As filed with the Securities and Exchange Commission on May 15, 2008

UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-FREGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT�OF 1934

OR� ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007OR

� TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934OR

� SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

Commission File Number: 1-15040

PRUDENTIAL PUBLIC LIMITED COMPANY(Exact Name of Registrant as Specified in its Charter)

England and Wales(Jurisdiction of Incorporation)

Laurence Pountney Hill,London EC4R 0HH, England

(Address of Principal Executive Offices)David Martin

Head of Group Financial Reporting and DevelopmentPrudential plc

Laurence Pountney Hill,London EC4R 0HH, England

+44 20 7548 3640david.martin@prudential.co.uk

(Name, telephone, e-mail and/or facsimile number and address of company contact person)Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class Name of Each Exchange on Which RegisteredAmerican Depositary Shares, each New York Stock Exchangerepresenting 2 Ordinary Shares, 5 pencepar value eachOrdinary Shares, 5 pence par value each New York Stock Exchange*

Securities registered or to be registered pursuant to Section 12(g) of the Act:None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None

The number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2007 was:2,470,017,240 Ordinary Shares, 5 pence par value each

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes X No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes No X

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required tofile such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of ‘‘accelerated filer and large accelerated filer’’ in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer X Accelerated filer Non-accelerated filer

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in thisfiling:U.S. GAAP International Financial Reporting Standards as issued by the International Accounting Standards Board X Other

If ‘‘Other’’ has been checked in response to the previous question, indicate by check mark which financial statement item theregistrant has elected to follow:

Item 17 Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes No X* Not for trading, but only in connection with the registration of American Depositary Shares.

TABLE OF CONTENTS

Page

Item 1. Not ApplicableItem 2. Not ApplicableItem 3. Key Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Selected Historical Financial Information of Prudential . . . . . . . . . . . . . . . . . 1Dividend Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Exchange Rate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10EEV Basis and New Business Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Item 4. Information on the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Business of Prudential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Group Strategy Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Company Address and Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Significant Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17Asian Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18US Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22UK Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Group Risk Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61Description of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

Supervision and Regulation of Prudential . . . . . . . . . . . . . . . . . . . . . . . . . 79UK Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79US Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89Asian Supervision and Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

Item 4A Unresolved staff comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104Item 5. Operating and Financial Review and Prospects . . . . . . . . . . . . . . . . . . . . . . . 105

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105Factors Affecting Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . 105Overview of Consolidated Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124Analysis by Business Segment and Geographic Region . . . . . . . . . . . . . . . . . 126Business Segment and Geographical Analysis by Nature of Revenue andCharges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145

Item 6. Directors, Senior Management and Employees . . . . . . . . . . . . . . . . . . . . . . . 155Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161Share Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176Board Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185

Item 7. Major Shareholders and Related Party Transactions . . . . . . . . . . . . . . . . . . . . 186Major Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187

Item 8. Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188

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TABLE OF CONTENTS

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Item 9. The Offer and Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188Comparative Market Price Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188Market Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Item 10. Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Memorandum and Articles of Association . . . . . . . . . . . . . . . . . . . . . . . . . 189Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196Exchange Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197Documents on Display . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

Item 11. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . 200Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Major Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201Currency of Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201Currency of Core Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201Sensitivity Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

Item 12. Not ApplicableItem 13. Defaults, Dividend Arrearages and Delinquencies . . . . . . . . . . . . . . . . . . . . . 205Item 14. Material Modifications to the Rights of Security Holders . . . . . . . . . . . . . . . . . 206Item 15. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206Item 16A. Audit Committee Financial Expert . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208Item 16B. Code of Ethics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208Item 16C. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208Item 16D. Exemptions from the Listing Standards for Audit Committees . . . . . . . . . . . . . . 211Item 16E. Purchases of Equity Securities by Prudential plc and Affiliated Purchasers . . . . . 211Item 17. Not ApplicableItem 18. Financial Statements

Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1Condensed Financial Information of Registrant . . . . . . . . . . . . . . . . . . . . . . S-1

Item 19. Exhibits

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Item 3. Key Information

SELECTED HISTORICAL FINANCIAL INFORMATION OF PRUDENTIAL

The following table sets forth Prudential’s selected consolidated financial data for the periodsindicated. Certain data is derived from Prudential’s audited consolidated financial statements prepared inaccordance with International Financial Reporting Standards as issued by the International AccountingStandards Board (collectively ‘‘IFRS’’). Were the Group to apply International Financial ReportingStandards as adopted by the European Union (‘‘EU’’) as opposed to those issued by the InternationalAccounting Standards Board (‘‘IASB’’), no additional adjustments would be required. This table is only asummary and should be read in conjunction with Prudential’s consolidated financial statements and therelated notes included elsewhere in this document, together with Item 5, ‘‘Operating and FinancialReview and Prospects’’.

The following table presents the income statement and balance sheet data for and as at the yearsended December 31, 2004 to 2007, as presented in accordance with IFRS, and has been derived fromPrudential’s consolidated financial statements, audited by KPMG Audit Plc:

Year Ended December 31,

2007(1) 2007 2006* 2005* 2004*

(In $ Millions) (In £ Millions)Income statement dataGross premium earned . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,430 18,359 16,157 15,225 16,408Outward reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . (339) (171) (171) (197) (256)

Earned premiums, net of reinsurance . . . . . . . . . . . . . . . . . . . 36,091 18,188 15,986 15,028 16,152Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,250 12,221 17,128 23,120 14,848Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,875 2,457 1,917 1,862 1,766

Total revenue, net of reinsurance . . . . . . . . . . . . . . . . . . . . . 65,216 32,866 35,031 40,010 32,766

Benefits and claims and movement in unallocated surplus ofwith-profits funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53,556) (26,990) (28,421) (33,100) (26,593)

Acquisition costs and other operating expenditure . . . . . . . . . . . (8,975) (4,523) (4,212) (4,514) (4,519)Finance costs: interest on core structural borrowings of shareholder-

financed operations . . . . . . . . . . . . . . . . . . . . . . . . . . . (333) (168) (177) (175) (154)Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . — — — (120) —

Total charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (62,864) (31,681) (32,810) (37,909) (31,266)

Profit before tax(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,352 1,185 2,221 2,101 1,500Tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . (38) (19) (849) (1,147) (711)

Profit before tax attributable to shareholders . . . . . . . . . . . . . . 2,314 1,166 1,372 954 789Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . (758) (382) (392) (242) (215)

Profit from continuing operations after tax . . . . . . . . . . . . . . . . 1,556 784 980 712 574Discontinued operations (net of tax)(3) . . . . . . . . . . . . . . . . . . 478 241 (105) 48 (58)

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,034 1,025 875 760 516

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As of and for the year ended December 31,

2007(1) 2007 2006 2005 2004

(In $ Millions, (In £ Millions, Except Share Information)Except ShareInformation)

Balance sheet dataTotal assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 436,038 219,744 216,520 207,436 180,006Total policyholder liabilities and unallocated surplus of with-profits

funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 378,146 190,569 178,587 170,315 145,211Core structural borrowings of shareholder financed operations . . . . 4,945 2,492 3,063 3,190 3,248Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,507 6,303 5,620 5,366 4,626Based on profit for the year attributable to the equity holders of the

Company:Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . 82.94¢ 41.8p 36.2p 31.6p 24.4pDiluted earnings per share . . . . . . . . . . . . . . . . . . . . . . 82.75¢ 41.7p 36.2p 31.6p 24.4pDividend per share declared and paid in reporting period(6) . . . . 34.57¢ 17.42p 16.44p 15.95p 15.48p

Equivalent cents per share(7) . . . . . . . . . . . . . . . . . . . . . . . — 34.70¢ 30.74¢ 29.61¢ 28.36¢Market price at end of period . . . . . . . . . . . . . . . . . . . . . . 1,413¢ 712p 699.5p 550p 453pWeighted average number of shares (in millions) . . . . . . . . . . . 2,445 2,413 2,365 2,121Other dataNew business from continuing operations:

Single premium sales(5) . . . . . . . . . . . . . . . . . . . . . . . . 29,699 14,967 14,027 12,848 11,427New regular premium sales(4)(5) . . . . . . . . . . . . . . . . . . . . 2,732 1,377 1,067 853 703

Gross investment product contributions . . . . . . . . . . . . . . . . 106,674 53,759 33,894 26,373 25,108Funds under management . . . . . . . . . . . . . . . . . . . . . . . . 529,808 267,000 251,000 234,000 197,000

* The presentation of the comparative results have been adjusted to reclassify Egg Banking plc (‘‘Egg’’) as discontinued operations asfurther described in note 3 below.

(1) Amounts stated in US dollars have been translated from pounds sterling at the rate of $1.9843 per £1.00 (the noon buying rate inNew York City on December 31, 2007).

(2) Profit before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before tax attributable topolicyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders’ profits.

(3) Discontinued operations predominantly relate to UK banking operations following the sale on May 1, 2007, of Egg to CitibankOverseas Investment Corporation, a subsidiary of Citigroup Inc (‘‘Citi’’). See note J of the notes to Prudential’s consolidated financialstatements.

(4) New regular premium sales are reported on an annualized basis, which represents a full year of installments in respect of regularpremiums irrespective of the actual payments made during the year.

(5) The new business premiums in the table shown above are provided as an indicative volume measure of transactions undertaken inthe reporting period that have the potential to generate profits for shareholders. The amounts shown are not, and not intended tobe, reflective of premium income recorded in the IFRS income statement.

New business premiums for regular premium products are shown on an annualized basis. Department of Work and Pensions(‘‘DWP’’) rebate business is classified as single recurrent business. Internal vesting business is classified as new business where thecontracts include an open market option.

The details shown above for new business include contributions for contracts that are classified under IFRS 4 ‘‘Insurance Contracts’’as not containing significant insurance risk. These products are described as investment contracts or other financial instruments underIFRS. Contracts included in this category are primarily certain unit-linked and similar contracts written in UK insurance operations andGuaranteed Investment Contracts and similar funding agreements written in US operations.

Investment products included in the table for funds under management above are unit trust, mutual funds and similar types of retailfund management arrangements. These are unrelated to insurance products that are classified as ‘‘investment contracts’’ underIFRS 4, as described in the preceding paragraph, although similar IFRS recognition and measurement principles apply to theacquisition costs and fees attaching to this type of business. US investment products are no longer included in the table above asthey are assets under administration rather than funds under management.

The table above includes the transfer of 62,000 with-profits annuity policies from Equitable Life on December 31, 2007, with assetsof approximately £1.7 billion.

The tables above include a bulk annuity transaction with the Scottish Amicable Insurance Fund (‘‘SAIF’’) with a premium of£560 million in June 2006. The transaction reflects the arrangement entered into for the reinsurance of non-profit immediate pensionannuity liabilities of SAIF to Prudential Retirement Income Limited (‘‘PRIL’’), a shareholder-owned subsidiary of the Group. SAIF is aclosed ring-fenced sub-fund of the Prudential Assurance Company Limited (‘‘PAC’’) long-term fund established by a Court approved

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Scheme of Arrangement in October 1997, which is solely for the benefit of SAIF policyholders. Shareholders have no interest in theprofits of this fund, although they are entitled to investment management fees on this business. The inclusion of the transactionbetween SAIF and PRIL as new business in the tables reflects the transfer from SAIF to Prudential shareholders’ funds of longevityrisk, the requirement to set aside supporting capital, and entitlement to surpluses arising on this block of business from thereinsurance arrangement. For Group reporting purposes the amounts recorded by SAIF and PRIL for the premium are eliminated onconsolidation.

(6) Under IFRS, dividends declared after the balance sheet date in respect of the prior reporting period are treated as a non-adjustingevent. The appropriation reflected in the statement of changes in equity, therefore, includes the final dividend in respect of the prioryear. Parent company dividends relating to the reporting period were an interim dividend of 5.70p per share in 2007 (2006: 5.42p,2005; 5.30p) and a final dividend of 12.30p per share in 2007 (2006:11.72p, 2005: 11.02p).

(7) The dividends have been translated into US dollars at the noon buying rate on the date each payment was made.

Dividend Data

Under UK company law, Prudential may pay dividends only if ‘‘distributable profits’’ of the holdingcompany are available for that purpose. ‘‘Distributable profits’’ are accumulated, realized profits notpreviously distributed or capitalized less accumulated, realized losses not previously written off, on theapplicable GAAP basis. Even if distributable profits are available, under UK law Prudential may paydividends only if the amount of its net assets is not less than the aggregate of its called-up share capitaland undistributable reserves (such as, for example, the share premium account) and the payment of thedividend does not reduce the amount of its net assets to less than that aggregate. For furtherinformation about the holding company refer to Schedule II. The financial information in Schedule II hasbeen prepared under UK GAAP reflecting the legal basis of preparation of the Company’s separatefinancial statements as distinct from the IFRS basis that applies to the Company’s consolidated financialstatements.

As a holding company, Prudential is dependent upon dividends and interest from its subsidiaries topay cash dividends. Many of its insurance subsidiaries are subject to regulations that restrict the amountof dividends that they can pay to Prudential. These restrictions are discussed in more detail in Item 4,‘‘Information on the Company—Supervision and Regulation of Prudential—UK Supervision andRegulation—Regulation of Insurance Business—Distribution of Profits and With-profits Business’’ andItem 4, ‘‘—Information on the Company—Supervision and Regulation of Prudential—US Supervision andRegulation—General’’.

Historically, Prudential has declared an interim and a final dividend for each year (with the finaldividend being paid in the year following the year to which it relates). Subject to the restrictionsreferred to above, Prudential’s directors have the discretion to determine whether to pay a dividend andthe amount of any such dividend but must take into account the Company’s financial position.

The following table shows certain information regarding the dividends per share that Prudentialdeclared for the periods indicated in pence sterling and converted into US dollars at the noon buyingrate in effect on each payment date. Interim dividends for a specific year now generally have a recorddate in August and a payment date in September of that year, and final dividends now generally have arecord date in the following April and a payment date in the following May. The comparative figures for2003 have been restated to take account of Prudential’s rights offering in 2004. The restatement factorused for this period is 0.9614 based on a theoretical ex-rights price of 405.71 pence divided by theclosing share price on the final day Prudential’s shares traded cum-rights of 422.00 pence.

Year Interim Dividend Interim Dividend Final Dividend Final Dividend

(pence) (US Dollars) (pence) (US Dollars)

2003 . . . . . . . . . . . . . . . . . . . . . . 5.09 0.0863 10.29 0.18672004 . . . . . . . . . . . . . . . . . . . . . . 5.19 0.0952 10.65 0.19502005 . . . . . . . . . . . . . . . . . . . . . . 5.30 0.0942 11.02 0.20462006 . . . . . . . . . . . . . . . . . . . . . . 5.42 0.1028 11.72 0.23172007 . . . . . . . . . . . . . . . . . . . . . . 5.70 0.1153 12.30

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A final dividend for 2007 of 12.30 pence per share was approved by the shareholders at theAnnual General Meeting held on May 15, 2008. The interim dividend for 2007 was 5.70 pence pershare. The total dividend for the year, including the interim dividend and the final dividend, amounts to18.00 pence per share compared with 17.14 pence per share for 2006, an increase of five per cent. Thetotal cost of dividends in respect of 2007 was £444 million. Dividend cover is calculated as operatingprofit based on longer-term investment returns after tax on an IFRS basis, divided by the current yeartotal dividend. The full dividend for 2007 is covered 1.9 times by post-tax IFRS operating profit basedon longer-term investment returns from continuing operations as discussed in Item 5. This compareswith dividend cover of 1.8, 1.8 and 1.3 for the years 2006, 2005 and 2004 respectively in which IFRSbasis results are available. The board will focus on delivering a growing dividend, which will continue tobe determined after taking into account the Group’s financial flexibility and opportunities to invest inareas of the business offering attractive returns. The Board believes that in the medium term a dividendcover of around two times is appropriate.

Exchange Rate Information

Prudential publishes its consolidated financial statements in pounds sterling. References in thisdocument to ‘‘US dollars’’, ‘‘US$’’, ‘‘$’’ or ‘‘¢’’ are to US currency, references to ‘‘pounds sterling’’, ‘‘£’’,‘‘pounds’’, ‘‘pence’’ or ‘‘p’’ are to UK currency (there are 100 pence to each pound) and references to‘‘Euro’’ or ‘‘e’’ are to the Euro. The following table sets forth for each year the average of the noonbuying rates on the last business day of each month of that year, as certified for customs purposes bythe Federal Reserve Bank of New York, for pounds sterling expressed in US dollars per pound sterlingfor each of the five most recent fiscal years. Prudential has not used these rates to prepare itsconsolidated financial statements.

Year ended December 31, Average rate

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.652004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.842005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.822006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.862007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.01

The following table sets forth the high and low noon buying rates for pounds sterling expressed inUS dollars per pound sterling for each of the previous six months:

High Low

November 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.11 2.05December 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.07 1.98January 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.99 1.95February 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.99 1.94March 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.03 1.98April 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.00 1.96

On May 13, 2008, the noon buying rate was £1.00 = $1.95.

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RISK FACTORS

A number of factors (risk factors) affect Prudential’s operating results, financial condition andtrading price. The risk factors mentioned below should not be regarded as a complete andcomprehensive statement of all potential risks and uncertainties. The information given is as of the dateof this report, is not updated, and any forward-looking statements are made subject to the reservationsspecified below under ‘‘Forward-Looking Statements’’.

Prudential’s businesses are inherently subject to market fluctuations and general economicconditions.

Prudential’s businesses are inherently subject to market fluctuations and general economicconditions. In the United Kingdom, this is because a significant part of Prudential’s shareholders’ profitis related to bonuses for policyholders declared on its with-profits products, which are broadly based onhistoric and current rates of return on equity, real estate and fixed income securities, as well asPrudential’s expectations of future investment returns.

In the United States, fluctuations in interest rates can affect results from Jackson National LifeInsurance Company (‘‘Jackson’’), which has a significant spread-based business and where the majorityof investments are in fixed-income securities. The spread is the difference between the rate of returnJackson is able to earn on the assets backing the policyholders’ liabilities and the amounts that arecredited to policyholders in the form of benefit increases, subject to minimum crediting rates. Jacksonalso writes a significant amount of variable annuities that offer capital or income protection guarantees.Any cost of the guarantees that remain unhedged will affect the Company’s results.

For some non unit-linked products, in particular those written in some of the Group’s Asianoperations, it may not be possible to hold assets which will provide cash flows to exactly match thoserelating to policyholder liabilities. This is particularly true in those countries where bond markets are notdeveloped and in certain markets such as Taiwan where regulated surrender values are set by regulatorswith reference to the interest rate environment prevailing at time of policy issue. This results in amismatch due to the duration and uncertainty of the liability cash flows and the lack of sufficient assetsof a suitable duration. This residual asset/liability mismatch risk can be managed but not eliminated.Where interest rates in these markets remain lower than interest rates used to calculate surrender valuesover a sustained period this could have an adverse impact on the Group’s reported profit.

In all markets in which Prudential operates, its businesses are susceptible to general economicconditions and changes in investment returns, which can also change the level of demand forPrudential’s products. Past uncertain trends in international economic and investment climates whichhave adversely affected Prudential’s business and profitability could be repeated. This adverse effectwould be felt principally through reduced investment returns and higher credit defaults. In addition,falling investment returns could impair its ability to write significant volumes of new business. Prudentialin the normal course of business enters into a variety of transactions, including derivative transactionswith counterparties. Failure of any of these counterparties, particularly in conditions of major marketdisruption, to discharge their obligations, or where adequate collateral is not in place, could have anadverse impact on Prudential’s results.

Prudential is subject to the risk of exchange rate fluctuations owing to the geographicaldiversity of its businesses.

Due to the geographical diversity of Prudential’s businesses, it is subject to the risk of exchangerate fluctuations. Prudential’s international operations in the United States and Asia, which represent asignificant proportion of operating profit and shareholders’ funds, generally write policies and invest inassets denominated in local currency. Although this practice limits the effect of exchange ratefluctuations on local operating results, it can lead to significant fluctuations in Prudential’s consolidated

5

financial statements upon translation of results into pounds sterling. The currency exposure relating tothe translation of reported earnings is not separately managed. Consequently, this could impact on theGroup’s gearing ratios (defined as debt over debt plus shareholders’ funds). The impact of gains orlosses on currency translations is recorded as a component within the statement of changes in equity.

Prudential conducts its businesses subject to regulation and associated regulatory risks,including the effects of changes in the laws, regulations, policies and interpretations and anyaccounting standards in the markets in which it operates.

Changes in government policy, legislation or regulatory interpretation applying to companies in thefinancial services and insurance industries in any of the markets in which Prudential operates, which insome circumstances may be applied retrospectively, may adversely affect Prudential’s product range,distribution channels, capital requirements and, consequently, reported results and financingrequirements. For instance, regulators in jurisdictions in which Prudential operates may change the levelof capital required to be held by individual businesses. Also these changes could include possiblechanges in the regulatory framework for pension arrangements and policies, the regulation of sellingpractices and solvency requirements. In the United Kingdom several proposed and potential regulatorychanges could have significant effect on the types of products Prudential provides to its customers andintermediaries and how those products are priced, distributed and sold. These include the FinancialServices Authority’s (‘‘FSA’’s) Treating Customers Fairly initiative, the FSA’s review of retail distribution,the proposed regulatory change affecting the pensions market and the implementation of the newEuropean Union (‘‘EU’’) solvency framework for insurers (‘‘Solvency II’’) which should be implementedby member states during 2012.

The current EU Insurance Groups Directive (‘‘IGD’’) requires European financial services groups todemonstrate net aggregate surplus capital in excess of solvency requirements at the Group level inrespect of shareholder-owned entities. The test is a continuous requirement, so that Prudential needs tomaintain a somewhat higher amount of regulatory capital at the Group level than otherwise necessary inrespect of some of its individual businesses to accommodate, for example, short-term movements inglobal foreign exchange rates, interest rates, deterioration in credit quality and equity markets. Inaddition, changes in the local regulatory environment of countries where this is deemed equivalent tothe EU could affect the calculation of the Group’s solvency position. The application of Solvency IIrequirements to international groups is still unclear and there is a risk of inconsistent application indifferent member states which may place Prudential at a competitive disadvantage to other Europeanand non-European financial services groups.

Various jurisdictions in which Prudential operates have created investor compensation schemes thatrequire mandatory contributions from market participants in some instances in the event of a failure of amarket participant. As a major participant in the majority of its chosen markets, circumstances couldarise where Prudential, along with other companies, may be required to make additional materialcontributions.

The Group’s accounts are prepared in accordance with current international financial reportingstandards applicable to the insurance industry. The International Accounting Standards Board (‘‘IASB’’)introduced a framework that it described as Phase I that permitted insurers to continue to use thestatutory basis of accounting that existed in their jurisdictions prior to January 2005. The IASB haspublished proposals in its Phase II discussion paper that would introduce significant changes to thestatutory reporting of insurance entities that prepare accounts according to international financialreporting standards. It is uncertain whether and how the proposals in the discussion paper will becomedefinitive international financial reporting standards and when such changes might take effect.

European Embedded Value (‘‘EEV’’) basis results are published as supplementary information forPrudential’s announcements to the UK Listing Authority and in its UK Annual Report. The EEV basis is a

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value based reporting method for Prudential’s long-term business which is used by market analysts andwhich underpins a significant part of the key performance indicators used by the Company’smanagement for both internal and external reporting purposes. The Chief Financial Officers’ (‘‘CFO’’)Forum will be publishing principles and guidance for calculating embedded value results on a market-consistent basis. Prudential intends to adopt the market-consistent approach in 2008. This will result in arestatement of reported EEV results and change the reporting basis of future results reported in the UK.

The resolution of several issues affecting the financial services industry could have a negativeimpact on Prudential’s reported results or on its reputation or on its relations with currentand potential customers.

Prudential is, and in the future may be, subject to legal and regulatory actions in the ordinarycourse of its business, both in the United Kingdom and internationally. This could be a review ofbusiness sold in the past under previously acceptable market practices at the time such as therequirement in the United Kingdom to provide redress to certain past purchasers of pension andmortgage endowment policies, changes to the tax regime affecting products and regulatory reviews onproducts sold and industry practices, including in the latter case businesses it has closed.

Regulators particularly, but not exclusively, in the United States and the United Kingdom are movingtowards a regime based on principles-based regulation which brings an element of uncertainty. Theseregulators are increasingly interested in the approach that product providers use to select third-partydistributors. In some case product providers can be held responsible for the deficiencies of third-partydistributors.

In the United States, federal and state regulators have focused on, and continue to devotesubstantial attention to, the mutual fund, fixed index and variable annuity and insurance productindustries. This includes new regulations in respect of the suitability of broker-dealers’ sales of certainproducts. As a result of publicity relating to widespread perceptions of industry abuses, there have beennumerous regulatory inquiries and proposals for legislative and regulatory reforms.

In Asia, regulatory regimes are developing at different speeds, driven by a combination of globalfactors and local considerations. There is a risk that new requirements are retrospectively applied tosales made prior to their introduction.

Litigation and disputes may adversely affect Prudential’s profitability and financial condition.

Prudential is, and may be in the future, subject to legal actions and disputes in the ordinary courseof its insurance, investment management and other business operations. These legal actions anddisputes may relate to aspects of Prudential’s businesses and operations that are specific to Prudential,or that are common to companies that operate in Prudential’s markets. Legal actions and disputes mayarise under contracts, regulations or from a course of conduct taken by Prudential, and may be classactions. Although Prudential believes that it has adequately reserved in all material aspects for the costsof litigation and regulatory matters, no assurance can be provided that such reserves are sufficient.Given the large or indeterminate amounts of damages sometimes sought, and the inherentunpredictability of litigation and disputes, it is possible that an adverse outcome could, from time totime, have an adverse effect on Prudential’s results of operation or cash flows.

Prudential’s businesses are conducted in highly competitive environments with developingdemographic trends and Prudential’s continued profitability depends on its management’sability to respond to these pressures and trends.

The markets for financial services in the United Kingdom, United States and Asia are highlycompetitive, with several factors affecting Prudential’s ability to sell its products and its continuedprofitability, including price and yields offered, financial strength and ratings, range of product lines and

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product quality, brand strength and name recognition, investment management performance, historicalbonus levels, developing demographic trends and customer appetite for certain savings products. Insome of its markets Prudential faces competitors that are larger, have greater financial resources or agreater market share, offer a broader range of products or have higher bonus rates or claims-payingratios. Further, heightened competition for talented and skilled employees with local experience,particularly in Asia, may limit the Group’s potential to grow its business as quickly as planned.

Within the United Kingdom, Prudential’s principal competitors in the life insurance market includemany of the major retail financial services companies including, in particular, Aviva, Legal & General,HBOS and Standard Life.

Jackson’s competitors in the United States include major stock and mutual insurance companies,mutual fund organizations, banks and other financial services companies such as AIG, AXA, Hartford,Lincoln National, MetLife and TIAA-CREF.

In Asia, the Group’s main regional competitors are international financial companies, including AIG,Allianz, AXA, ING and Manulife, as well as a number of local companies with a significant marketpresence in certain countries.

Prudential believes competition will intensify across all regions in response to consumer demand,technological advances, the impact of consolidation, regulatory actions and other factors. Prudential’sability to generate an appropriate return depends significantly upon its capacity to anticipate andrespond appropriately to these competitive pressures.

Downgrades in Prudential’s financial strength and credit ratings could significantly impact itscompetitive position and hurt its relationships with creditors or trading counterparties.

Prudential’s financial strength and credit ratings, which are used by the market to measure its abilityto meet policyholder obligations, are an important factor affecting public confidence in most ofPrudential’s products, and as a result its competitiveness. Changes in methodologies and criteria used byrating agencies could result in downgrades that do not reflect changes in the general economicconditions or Prudential’s financial condition. Downgrades in Prudential’s ratings could have an adverseeffect on its ability to market products and retain current policyholders. In addition, the interest ratesPrudential pays on its borrowings are affected by its debt credit ratings, which are in place to measurePrudential’s ability to meet its contractual obligations. Prudential believes the credit rating downgrades itexperienced in 2002 and 2003, together with the rest of the United Kingdom insurance industry, and in2006 by Standard & Poor’s to bring Prudential into line with the standard rating agency notchingbetween operating subsidiary financial strength rating and the credit rating for other European insuranceholding companies, have not to date had a discernible impact on the performance of its business.

Prudential’s long-term senior debt is rated as A2 (stable outlook) by Moody’s, A+ (stable outlook)by Standard & Poor’s and AA� (stable outlook) by Fitch.

Prudential’s short-term debt is rated as P-1 by Moody’s, A-1 by Standard & Poor’s and F1+ by Fitch.

Prudential Assurance Company’s (PAC’s) financial strength is rated Aa1 (negative outlook) byMoody’s, AA+ (stable outlook) by Standard & Poor’s and AA+ (stable outlook) by Fitch.

Adverse experience in the operational risks inherent in Prudential’s business could have anegative impact on its results of operations.

Operational risks are present in all of Prudential’s businesses, including the risk of direct or indirectloss resulting from inadequate or failed internal and external processes, systems and human error orfrom external events. Prudential’s business is dependent on processing a large number of complextransactions across numerous and diverse products, and is subject to a number of different legal and

8

regulatory regimes. In addition, Prudential outsources several operations, including in the UnitedKingdom a significant part of its back office and customer-facing functions as well as a number of ITfunctions. In turn, Prudential is reliant upon the operational processing performance of its outsourcingpartners.

Further, because of the long-term nature of much of Prudential’s business, accurate records have tobe maintained for significant periods. Prudential’s systems and processes incorporate controls which aredesigned to manage and mitigate the operational risks associated with its activities. For example, anyweakness in the administration systems or actuarial reserving processes could have an impact on itsresults of operations during the effective period. Prudential has not experienced or identified anyoperational risks in its systems or processes during 2007, which caused, or which have subsequentlycaused, or are expected to cause, a significant negative impact on its results of operations.

Adverse experience against the assumptions used in pricing products and reporting businessresults could significantly affect Prudential’s results of operations.

Prudential needs to make assumptions about a number of factors in determining the pricing of itsproducts and for reporting the results of its long-term business operations. For example, the assumptionthat Prudential makes about future expected levels of mortality is particularly relevant for its UnitedKingdom annuity business. In exchange for a premium equal to the capital value of their accumulatedpension fund, pension annuity policyholders receive a guaranteed payment, usually monthly, for as longas they are alive. Prudential conducts rigorous research into longevity risk, using data from itssubstantial annuitant portfolio. As part of its pension annuity pricing and reserving policy, PrudentialUnited Kingdom assumes that current rates of mortality continuously improve over time at levels basedon adjusted data from the Continuous Mortality Investigations (‘‘CMI’’) medium cohort table projections(as published by the Institute and Faculty of Actuaries). If mortality improvement rates significantlyexceed the improvement assumed, Prudential’s results of operations could be adversely affected.

A further example is the assumption that Prudential makes about future expected levels of the ratesof early termination of products by its customers (persistency). This is particularly relevant to its lines ofbusiness other than its United Kingdom annuity business. Prudential’s persistency assumptions reflectrecent past experience for each relevant line of business. Any expected deterioration in futurepersistency is also reflected in the assumption. If actual levels of future persistency are significantlylower than assumed (that is, policy termination rates are significantly higher than assumed), Prudential’sresults of operations could be adversely affected.

In common with other industry participants, the profitability of the Group’s businesses depends on amix of factors including mortality and morbidity trends, policy surrender rates, investment performance,unit cost of administration and new business acquisition expense.

As a holding company, Prudential is dependent upon its subsidiaries to cover operatingexpenses and dividend payments.

Prudential’s insurance and investment management operations are generally conducted throughdirect and indirect subsidiaries. As a holding company, Prudential’s principal sources of funds aredividends from subsidiaries, shareholder-backed funds, the shareholder transfer from Prudential’slong-term funds and any amounts that may be raised through the issuance of equity, debt andcommercial paper. Certain of the subsidiaries are regulated and therefore have restrictions that can limitthe payment of dividends, which in some circumstances could limit the Group’s ability to pay dividendsto shareholders.

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Prudential operates in a number of markets through joint ventures and other arrangementswith third parties. These arrangements involve certain risks that Prudential does not face withrespect to its consolidated subsidiaries.

Prudential operates, and in certain markets is required by local regulation to operate, through jointventures. Prudential’s ability to exercise management control over its joint venture operations and itsinvestment in them depends on the terms of the joint venture agreements, in particular, the allocation ofcontrol among, and continued co-operation between, the joint venture participants. Prudential may alsoface financial or other exposure in the event that any of its joint venture partners fails to meet itsobligations under the joint venture or encounters financial difficulty. In addition, a significant proportionof the Group’s product distribution is carried out through arrangements with third parties not controlledby Prudential and is dependent upon continuation of these relationships. A temporary or permanentdisruption to these distribution arrangements could affect Prudential’s results of operations.

FORWARD-LOOKING STATEMENTS

This annual report may contain certain forward-looking statements with respect to certain ofPrudential’s plans and its current goals and expectations relating to its future financial condition,performance, results, strategy and objectives. Statements containing the words ‘‘believes’’, ‘‘intends’’,‘‘expects’’, ‘‘plans’’, ‘‘seeks’’ and ‘‘anticipates’’, and words of similar meaning, are forward-looking. Bytheir nature, all forward-looking statements involve risk and uncertainty because they relate to futureevents and circumstances which are beyond Prudential’s control including among other things, economicand business conditions in the countries in which Prudential operates, market related risks such asfluctuations in interest rates and exchange rates, and the performance of financial markets generally; thepolicies and actions of regulatory authorities, the impact of competition, inflation, and deflation;experience in particular with regard to mortality and morbidity trends, lapse rates and policy renewalrates; the timing, impact and other uncertainties of future acquisitions or combinations within relevantindustries; the impact of changes in capital, solvency or accounting standards, and tax and otherlegislation and regulations in the jurisdictions in which Prudential and its affiliates operate; and theimpact of legal actions and disputes, together with other factors discussed in ‘‘Risk Factors’’. This mayfor example result in changes to assumptions used for determining results of operations orre-estimations of reserves for future policy benefits. As a result, Prudential’s actual future financialcondition, performance and results may differ materially from the plans, goals, and expectations set forthin Prudential’s forward-looking statements.

In particular, the following are forward-looking in nature:

• certain statements in Item 4, ‘‘Information on the Company’’ with regard to strategy andmanagement objectives, trends in market shares, prices, market standing and product volumesand the effects of changes or prospective changes in regulation, and

• certain statements in Item 5, ‘‘Operating and Financial Review and Prospects’’ with regard totrends in results, prices, volumes, operations, margins, overall market trends, risk managementand exchange rates and with regard to the effects of changes or prospective changes inregulation.

Prudential may also make or disclose written and/or oral forward-looking statements in reports filedor furnished to the US Securities and Exchange Commission, Prudential’s annual report and accounts toshareholders, proxy statements, offering circulars, registration statements and prospectuses, pressreleases and other written materials and in oral statements made by directors, officers or employees ofPrudential to third parties, including financial analysts. Prudential undertakes no obligation to update anyof the forward-looking statements contained in this annual report or any other forward-lookingstatements it may make.

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EEV BASIS AND NEW BUSINESS RESULTS

In addition to IFRS basis results, the Group’s filings with the UK Listing Authority and Group AnnualReports include reporting by Key Performance Indicators (‘‘KPIs’’). These include results prepared inaccordance with the European Embedded Value (‘‘EEV’’) Principles and Guidance issued by the ChiefFinancial Officers’ (‘‘CFO’’) Forum of European Insurance Companies, and New Business measures.

The EEV basis is a value based method of reporting in that it reflects the change in the value ofin-force long-term business over the accounting period. This value is called the shareholders’ funds onthe EEV basis which, at a given point in time, is the value of future cash flows expected to arise fromthe current book of long-term insurance business plus the net worth (based on statutory solvency capital(or economic capital where higher) and unencumbered capital) of the company. EEV basis results arepublished semi-annually by the company in the UK Market.

New Business results are published quarterly and are provided as an indicative volume measure oftransactions undertaken in the reporting period that have the potential to generate profits forshareholders. The amounts are not, and are not intended to be, reflective of premium income recordedin the IFRS income statement.

The Company’s KPIs also include IFRS basis operating profit based on longer-term investmentreturns as explained in Item 5.

Item 4. Information on the Company

BUSINESS OF PRUDENTIAL

Overview

Prudential is a leading international financial services group, providing retail financial services in themarkets in which it operates, primarily the United Kingdom, the United States and Asia. AtDecember 31, 2007, Prudential was one of the 30 largest public companies in the United Kingdom interms of market capitalization on the London Stock Exchange. Prudential is not affiliated with PrudentialFinancial, Inc. or its subsidiary, The Prudential Insurance Company of America.

Prudential has been writing life insurance policies in the United Kingdom for over 150 years andhas had one of the largest long-term funds in the United Kingdom for over a century. Prudentialexpanded its business into British Commonwealth countries, including Singapore and Malaysia, in the1920s and 1930s. In 1986, Prudential acquired Jackson National Life Insurance Company (‘‘Jackson’’), aUS insurance company writing life and fixed annuity business. A group strategy review in the early1990s identified significant opportunities for Prudential in the Asian life sector and PrudentialCorporation Asia was established in 1994 to develop a material and profitable Asian business. In 1999,Prudential acquired M&G, a leading UK fund manager. In June 2000, Prudential completed its listing onthe New York Stock Exchange.

Prudential Corporation Asia is the leading European-based life insurer in Asia in terms of marketcoverage and number of top three positions in markets(1), with operations in 13 Asian countries.Prudential Corporation Asia offers a mix of life insurance with accident and health options, mutual fundsand selected personal lines property and casualty insurance with the product range tailored to suit theindividual country markets. Its insurance products are distributed mainly through an agency sales-forceand complementary bancassurance agreements while the majority of mutual funds are sold throughbanks and brokers. Its life insurance operations in China and India are conducted through joint venturesin which it holds 49 per cent and 26 per cent, respectively. In addition, in India, Prudential holds 49 percent of a fund management joint venture with ICICI, in China it has a 50 per cent stake in a fundsmanagement joint venture with CITIC, which is called CITIC-Prudential, and in Hong Kong, it holds a36 per cent stake in a joint venture with Bank of China International for MPF and mutual funds.

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At December 31, 2007, Prudential Corporation Asia:

• had operations in 13 countries and was Europe’s leading life insurer in Asia in terms of marketcoverage and number of top 3 market positions;

• was the region’s second largest manager of retail funds (excluding Japan), where retail includesunit trusts, mutual funds and similar types of fund;

• had over 410,000 tied agents and multiple third party distribution agreements; and

• over twelve million life insurance policies in force.

In the United States, Prudential offers a range of products through Jackson, including fixed, fixedindex and variable annuities; life insurance; guaranteed investment contracts; and funding agreements.Prudential distributes these products through independent insurance agents; securities broker-dealers;registered investment advisors; a small captive agency channel, consisting of approximately 100 lifeinsurance agents; and banks, credit unions and other financial institutions. Prudential also offersfee-based separately managed accounts and investment products through Curian Capital, LLC, which isJackson’s registered investment advisor channel, established in 2003.

At December 31, 2007, in the United States, Jackson was:

• the seventeenth largest life insurance company in terms of General Account assets(2);

• the tenth largest provider of individual traditional fixed deferred annuities in terms of sales(3),

• the eighth largest provider of fixed index annuities in terms of sales(4);

• the twelfth largest provider of variable annuities in terms of sales(5); and

• rated A1 (stable outlook) by Moody’s, AA (stable outlook) by Standard & Poor’s and AA (stableoutlook) by Fitch in terms of financial strength rating. The ratings from Standard & Poor’s andFitch represent the third highest ratings and the rating from Moody’s represents the fifth highestrating out of their respective rating categories.

In the United Kingdom, Prudential offers a range of retail financial products and services, includinglong-term insurance and asset accumulation and retirement income products (life insurance, pensionsand pension annuities), retail investment and unit trust products, and fund management services.Prudential primarily distributes these products through financial advisors, partnership agreements withbanks and other financial institutions, and direct marketing, by telephone, mail, internet and face to faceadvisors.

At December 31, 2007, in the United Kingdom, Prudential was:

• the proprietor of one of the largest long-term funds of investment assets supporting long-terminsurance products (the Prudential Assurance Company long-term fund)(6);

• a market leader in the corporate pensions market providing solutions to over 20 per cent of theFTSE 350 companies;

• the fourth largest United Kingdom asset manager(7); and

• rated as Aa1 by Moody’s, AA+ by Standard and Poor’s and AA by Fitch for financial strength ofthe Prudential Assurance Company. Moody’s placed the Prudential Assurance Company onnegative outlook on May 16, 2007. All other ratings are with a stable outlook. The ratings fromMoody’s, Standard & Poor’s and Fitch for the Prudential Assurance Company represent thesecond highest ratings in their respective rating categories.

(1) Source: Prudential analysis of latest externally available new business market statistics

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(2) Source: Statutory financial data per National Underwriter Insurance Data Services from Highline Data, rankings as of9/30/07, latest rankings available

(3) Source: LIMRA. Quarterly rankings and market share are year-to-date figures. Fixed includes FIA sales. Traditional Fixed istraditional individual deferred fixed annuities and does not include FIA, immediate or structured settlements

(4) Source: The Advantage Compendium

(5) Source: VARDS

(6) Source: Company return to FSA

(7) Source: Watson Wyatt

Group Strategy Overview

Prudential’s objective

Prudential’s overriding objective is to generate sustainable value for its shareholders by combining aclear focus on delivering profitable growth in the short term, with sound strategic positioning to capturelong term growth opportunities.

Prudential’s strategic focus

Prudential’s strategy is centered on the global retirement opportunity, where it believes it has theassets and capabilities to capture a disproportionate share of this growing profit pool over the comingyears.

Prudential’s key markets

Geographically, Prudential will focus on expanding its existing franchises in Asia, the United Statesand the United Kingdom, where it already holds strong and often market-leading positions.

Prudential’s assets and capabilities

Within these markets, Prudential intends to continue to leverage its brands, its product innovationskills and its investment management and risk management expertise to develop and deliver solutionsthat meet the changing needs of customers throughout their pre- and post- retirement years, and it willlook to further strengthen its powerful distribution networks to enable it to bring those products tomarket successfully.

Prudential will use its local knowledge to try and ensure it tailors solutions to local market needs,while at the same time, continuing to leverage the benefits of the Group as a whole in terms of greatercapital efficiency, greater risk appetite and operational synergies.

Driving Growth

Asia

Prudential’s strategy in Asia is to continue to build quality, multi-channel distribution that deliverscustomer-centric and profitable products in segments that have the potential for sustained growth, withan increasing emphasis on retirement solutions.

United States

The United States is the largest retirement savings market in the world, and Jackson’s strategy is toleverage its product innovation skills, relationship-based distribution model and low cost infrastructure tocapture a growing and profitable share of this market.

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United Kingdom

Prudential UK’s strategy is to concentrate on those areas of the retirement savings and incomemarkets where it can generate attractive returns, capitalizing on its longevity experience, multi-assetmanagement capabilities, brand and financial strength.

M&G

M&G’s strategy is to focus on delivering superior investment performance and maximizingrisk-adjusted returns for its retail, wholesale and internal clients.

2007 Priorities

A summary of the 2007 priorities and the level of achievement in respect of these for the year isdetailed in the table below:

2007 Summary Priorities 2007 Summary Achievements

Group

• Improve Group holding company cash flow(1) • Operating cash flow improved and Prudential isand maintain robust capital position on target to be operating cash flow positive in

2008.• Deliver growing dividend, targeting two- times • The full year dividend is up five per cent with

cover over time 1.9 times cover• Share expertise and innovation across the Group • Prudential continues to share expertise across

borders. For example, it has drawn on Jackson’sexperience to offer variable annuity products inAsia.

Asia

• At least double 2005 EEV new business profits • Prudential anticipates that, based on currentby 2009(2) levels of performance and trends, that this

target will be met a year early.• Expand distribution and improve productivity • Agent numbers grew by 125,000 to 410,000,

and agency sales were up 44 per cent. Agentproductivity increased, including improvementsof 67 per cent in Vietnam and 21 per cent inSingapore.

• Continue product innovation with focus on • Prudential launched the ‘‘What’s your number?’’retirement and wealth retirement campaign in six Asian Markets, and

new health products in Singapore, India andHong Kong.

United States

• Continue to enhance and expand the existing • Prudential introduced six guaranteed livingproduct offering benefits and a further 20 investment options to

its variable annuity product.• Continue to take profitable share of variable • Prudential’s variable annuity market share grew

annuities to 5.1 per cent, up from 4.6 per cent in 2006(3).• Increase share of US retail asset management • Prudential launched a range of retail mutual

market fund products. Curian increased assets undermanagement by 42 per cent in 2007.

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2007 Summary Priorities 2007 Summary Achievements

United Kingdom

• Build retirement income business • Prudential wrote one in four of the UK’sindividual annuities and grew its lifetimemortgage business to a 14 per cent marketshare(4).

• Focus on profitable retirement savings and • Prudential has withdrawn from unprofitablewholesale opportunities product areas and developed a factory gate

proposition aimed at distribution partners withgood persistency. Prudential completed the£1.7 billion Equitable Life transaction.

• Deliver targeted cost savings • By the end of 2007, £115 million of the costsaving target of £195 million had been deliveredand plans are in place to deliver the additional£80 million.

• Consider reattribution of the inherited estate • Prudential nominated a Policyholder Advocate.A decision whether to proceed will be made inthe first half of 2008.

Asset Management

• Maintain strong investment performance • 45 per cent of M&G’s retail mutual fundsdelivered top quartile performance. 86 per centof segregated institutional mandates met orexceeded their benchmarks.

• Develop product range • New funds were launched in five Asian markets,the US and the UK.

• Expand distribution reach • M&G increased its distribution reach in Europe,and Prudential’s Asian business broadened itsmulti-channel distribution network across theregion.

(1) Holding company cash flow is the increase or decrease in cash and short-term investments of the holding company andrelated finance subsidiaries during the reporting period.

(2) EEV new business profits are the present pre-tax value of future shareholder cash flows from new business, less a deductionfor the cost of locked-in (encumbered) capital and the impact of the time value of options and guarantees as prepared inaccordance with the EEV Principles and Guidance issued by the CFO Forum of European Insurance Companies and reportedin the UK. See ‘‘Item 3—Key Information—EEV Basis and New Business Results’’.

(3) Source: Morning Star Research Center

(4) Source: SHIP

2008 Priorities

Group

Prudential’s overriding objective for 2008 remains that of continuing to create value for itsshareholders by fully exploiting the power of its retirement-led strategy and continuing to expand the

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excellent businesses that it has in place today. On a business unit basis Prudential aims to focus on thefollowing priorities in 2008:

Life insurance

In Asia:

• Expand the agency force and continue to improve productivity

• Maximize the potential from non-agency distribution and add new partners

• Further develop direct marketing channels and up-sell and cross-sell

• Increased focus on retirement services and health products

In the US:

• Continue to innovate around its key variable annuity product

• Enhance its world-class operating platform

• Expand retail distribution

• Selectively participate in the institutional market

In the UK:

• Build on its strengths in the retirement market and risk products

• Migrate to factory gate cautiously managed asset accumulation products

• Deliver on the cost reduction program including the outsource program

• Selectively participate in the institutional market

• Determine whether it is in the best interest of policyholders and shareholders to pursue areattribution of the inherited estate

Asset management

• Maintain superior investment performance for both internal and external funds

• Extend third party retail and institutional businesses

Summary

In 2007, Prudential’s operating performance was strong, building on the positive momentumestablished in 2005 and 2006.

The combination of Prudential’s retirement-led strategy, a clear focus on generating profitablegrowth and excellence in the delivery of its plans is driving shorter-term performance and also placingthe Group in a strong position from which to outperform in the longer-term.

Prudential believes that the retirement market offers significant long-term sustainable growthopportunities as a significant demographic wave transitions out of the work-force and into retirement.The Prudential Group has a strong presence in this sector based on its financial strength, its investmentand risk management skills, its brands and its product and distribution expertise.

There is significant volatility and nervousness in markets and it is likely that there will be a periodof less attractive economic growth trends in the US and in the UK than it has seen in recent years.Notwithstanding this, Prudential believes that its strategy and its business model are very robust and arewell placed to continue to deliver sustainable value.

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In Asia, the fundamentals underpinning economic growth remain powerful and Prudential’sbusinesses are very well placed to benefit. Prudential believes it is currently on track to deliver in 2008,one year earlier than previously stated, on its target of at least doubling 2005 EEV basis new businessprofit by 2009.

In the US, Prudential believes it is well positioned to continue its record of out performance andthat its value driven strategy in the UK is on track.

In the UK Prudential has already de-emphasized those products which it believes might have beenmore sensitive to market conditions.

Prudential’s asset management businesses, although more directly influenced by market movements,are well placed to capitalize on their strong market positions and investment performance to deliver netflows and profit growth.

Prudential believes that overall the prospects for the Group in 2008 remain positive and that overthe longer-term the demographic, economic and social factors driving its business are likely to continueand it is ideally positioned to capture a greater share of that growth.

Company Address and Agent

Prudential plc is a public limited company incorporated on November 1, 1978, and organized underthe laws of England and Wales. Prudential’s registered office is Laurence Pountney Hill, LondonEC4R 0HH, England (telephone: +44 20 7220 7588). Prudential’s agent in the United States is JacksonNational Life Insurance Company, located at 1 Corporate Way, Lansing, Michigan 48951, United States ofAmerica.

Significant Subsidiaries

The table below sets forth Prudential’s significant subsidiaries.

Percentage Country ofName of Company Owned(1) Incorporation

The Prudential Assurance Company Limited . . 100% England and WalesPrudential Annuities Limited(2) . . . . . . . . . . . 100% England and WalesPrudential Retirement Income Limited(2) . . . . . 100% ScotlandM&G Investment Management Limited(2) . . . . 100% England and WalesJackson National Life Insurance Company(2) . . 100% United StatesPrudential Assurance Company Singapore

(Pte) Limited(2) . . . . . . . . . . . . . . . . . . . 100% SingaporePCA Life Assurance Company Limited(2) . . . . 99% Taiwan

(1) Percentage of equity owned by Prudential directly or indirectly. The percentage of voting power held is the same as thepercentage owned. Each subsidiary has one class of ordinary shares and operates mainly in its country of incorporation,except for Prudential Retirement Income Limited which operates mainly in England and Wales.

(2) Owned by a subsidiary of Prudential.

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Asian Business

Asia’s life insurance markets are very attractive with large scale and high growth rates supported byeconomic growth, favorable demographics and market liberalizations. However, there are someformidable barriers to successful entry, including entrenched incumbents, the pace of change and natureof regulations, mandatory domestic partners in some markets and a shortage of experienced staff.Acquisition opportunities, particularly of scale businesses, are limited and in North Asian markets arelikely to involve back books that currently experience negative spread and hence require materialprovisions under European regulatory capital requirements.

Prudential’s strategy in Asia is to build quality, multi-channel distribution that delivers customercentric and profitable products in segments with the potential for sustained growth. By necessity, theapproach to each market varies, but all operations are unified under the Prudential icon and commonbrand values. Prudential believes that, as its track history demonstrates, it has the ability to leveragelearning and expertise from within the region and the wider Group to accelerate the development ofunique opportunities as they arise in each market.

The ability to execute the strategy is highly dependent on the strength and depth of themanagement talent pool in the region and consequently Prudential invests in continually strengtheningand developing its teams. The operating model empowers local management teams with a regional teamoverseeing control functions such as risk management and providing strategic guidance and technicalsupport in areas such as distribution optimization and product design.

Asia remains a very attractive region for growth opportunities due to its high levels of economicactivity translating into higher levels of personal wealth, greater disposable incomes, a comparativelyhigher propensity to save and a growing appetite for good quality protection and savings products.Traditionally older people have relied on their children to provide for them, but within just onegeneration this is expected to be far less common. Within this environment, ageing demographics arealso beginning to drive increased household savings rates and an emerging need for healthcare andretirement solutions.

Asian governments generally have little appetite to increase the provision of state funded retirementbenefits and healthcare and are actively encouraging the development of a strong, dynamic privatesector to meet people’s growing need for financial solutions.

Life Insurance

Prudential has a market leading platform with a top three market share position, in terms of newbusiness APE, in seven of its twelve markets (Source: Prudential analysis of latest externally availablenew business market statistics). Prudential has a unique position in Vietnam with a market leading lifeinsurance business and well respected brand. To further leverage this platform, Prudential launched aconsumer finance company in September 2007. Prudential has the leading private sector life insurancejoint ventures in China and India. Prudential Corporation Asia’s high proportion of profitable, regularpremium business combined with sound operational management means cash flows can be predictedwith some certainty. As previously announced the business had net positive remittances of surplus cashback to the Group in 2007.

Distribution

Agency is the predominant distribution channel in Asia and for Prudential, the agency force againgenerated 70 per cent of new business volumes in 2007. Success in agency distribution requiresbuilding and maintaining meaningful scale in terms of agent numbers whilst also providing theinfrastructure to manage agent training and skills development to drive agency productivity. Prudential’sagency priority depends on the stage of development of each individual market and Prudential’soperation within it. For example in India, Prudential’s joint venture with ICICI has been rapidly

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expanding, with the addition of 593 new branches during the year to give a total of 1,065 andcorrespondingly average agent numbers in 2007 increased by 123 per cent and at 31 December therewere 277,000 agents.

Similarly in China, although the rate of geographic expansion is slower as each new city requiresseparate regulatory approvals the emphasis is also on expanding the agency channel; average numberswere up 38 per cent and at December 31 there were 20,500 agents. In markets where Prudential hassufficient agency scale, the emphasis is on helping those agents become more productive throughintensified training and sales management support. Agent productivity, in terms of average APE peragent, increased by 67 per cent in Vietnam and 21 per cent in Singapore during 2007.

Prudential has a large partnership distribution network in Asia. During 2007, Prudential extended itsagreements with Standard Chartered Bank to include Taiwan where it will exclusively providebancassurance products in their newly acquired HsinChu International Bank with its 83 branches and2.4 million customers. In Korea regulation states that a bank can only source a maximum of 25 per centof its total insurance sales from any one insurer, and with Prudential’s sales through existing bankpartners regularly reaching their maximum shares adding new banks is a priority. In 2007 Prudentialsecured two major new banks, Industrial Bank of Korea and Kookmin Bank. Prudential’s regionalbancassurance relationship with Citibank also grew strongly with new business APE generated of£23 million being 12 per cent of total bank distribution for 2007.

Although still small, new business from direct marketing grew by 58 per cent over 2006 withThailand performing well and recording growth of 55 per cent. The regional Direct Marketing team hasbeen strengthened and work is now underway on exploring further opportunities.

Products

The life insurance products offered by Prudential Corporation Asia include a range of with-profits(participating) and non-participating term, whole life endowment and unit-linked policies. Prudential alsooffers health, disablement, critical illness and accident cover to supplement its core life products.Prudential’s business in Asia is focused on regular premium products that provide both savings andprotection benefits. In 2007, the new business profit mix was 63 per cent unit-linked, 15 per centnon-linked and 22 per cent accident and health products. At the end of 2007 Prudential CorporationAsia offered unit-linked products in 10 of the 12 countries in Asia in which it operates.

Unit-linked products combine savings with protection and the cash value of the policy depends onthe value of the underlying unitized funds. Participating products provide savings with protection wherethe basic sum assured can be enhanced by a profit share (or bonus) from the underlying fund asdetermined at the discretion of the insurer. Non-participating products offer savings with protectionwhere the benefits are guaranteed or determined by a set of defined market related parameters.Accident and health products provide mortality or morbidity benefits and include health, disablement,critical illness and accident covers. Accident and health products are commonly offered as supplementsto main life policies but can also be sold separately.

The profits from participating policies are shared between the policyholder and insurer (typically ina 90:10 ratio) in the same way as with-profits business in the United Kingdom as detailed in ‘‘—UKBusiness—UK Products and profitability’’ below. Under unit-linked products the profits that arise frommanaging the policy, its investments and the insurance risk accrue entirely to shareholders, withinvestment gains accruing to the policyholder within the underlying unitized fund. The profits fromaccident and health and non-participating products consist of any surplus remaining after paying policybenefits.

In 2007 Prudential continued to broaden its range of products. This included a new Takaful range inIndonesia, launched in September 2007, and a new variable annuity product in Taiwan.

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Systematic cross-sell campaigns were launched across the region, contacting more than 2 million ofour existing customers. These included the initiation of a regular up-sell in Hong Kong through theindexation of policy benefits initiatives to capture maturity proceeds in Singapore and a targeted offer ofguaranteed increases in protection benefits in Malaysia.

In Asia, there are very material opportunities arising in the provision of healthcare solutions.Prudential successfully piloted new supplemental health products in Singapore, India and Hong Kongduring the year, selling over 125,000 new policies.

Helping people address their financial needs for retirement is also a major growth opportunity andwhilst Prudential already has a number of products designed to support the accumulation phase of aretirement fund, work is now underway on drawdown options and supporting related protection andhealth products. Prudential has already begun positioning itself as a provider of retirement solutionsthrough the roll out of the successful ‘What’s your number?’ campaigns in six countries whichencourages people to think about what resources they are likely to need to finance their retirementaspirations.

New Business Premiums

In 2007, total sales of insurance products were £2,944 million, up 53 per cent from 2006(£1,921 million). Of this amount, regular premium insurance sales were up 32 per cent to £1,124 millionand single premium insurance sales increased 70 per cent to £1,820 million.

The following table shows Prudential’s Asian life insurance new business premiums by territory forthe periods indicated. In this table ‘‘Other Countries’’ includes Thailand, the Philippines and Vietnam.

2007 2006

£m £m

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660 429Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618 458Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 76Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350 231Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 75Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420 311China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 63Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 102India (Group’s 26% interest in joint venture with ICICI) . . . . . . . . . 203 125Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 51

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,944 1,921

Subsequent to September 29, 2007, and following the change in management stipulated in theoriginal agreement, CITIC-Prudential Life Insurance Company Ltd (‘‘CITIC-Prudential’’), the Group’s lifeoperation in China, has been accounted for as a joint venture. Prior to this date CITIC-Prudential wasconsolidated as a subsidiary undertaking. The totals above include 100 per cent of total premiums forCITIC-Prudential up to September 29, 2007 and 50 per cent thereafter, being Prudential’s share afterthis date.

Asset Management

Prudential Asset Management (‘‘PAM’’) (formerly PPM Asia) is Prudential Corporation Asia’s fundmanagement division responsible for managing Prudential Corporation Asia’s life and third partyinstitutional funds including the Prudential group’s investments in the Asia-Pacific region. PAM hasoffices in Singapore, Hong Kong and Tokyo.

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Prudential’s asset management business in Asia supports the Life Business, and has establisheditself as an increasingly material retail business in its own right. Today it has retail operations in tenmarkets and Prudential believes it has more top five market share positions than many other foreignfund managers in the region.

The mutual fund industry continues to diversify its investments, with expectations being for asignificant increase in net flows over the coming years. Bank distribution continues to dominate in mostmarkets in Asia, with Prudential having established strong relationships with both regional and localbanks and placing great emphasis on providing good service.

Distribution

A key achievement in 2007 was the expansion of regional distribution relationships with Citi andHSBC. The Asian asset management business also signed a global partnership agreement with HSBCPrivate Banking and is now part of the Credit Suisse Fundslab platform.

Prudential launched a retail mutual fund business in Hong Kong in October 2007. Since launch sixdistribution relationships have been signed, including banks, financial advisers and an on-line portal.

Products

Prudential offers mutual fund investment products in India, Taiwan, Japan, Singapore, Malaysia,Hong Kong, Korea, Vietnam and China, allowing customers to participate in debt, equity and moneymarket investments. It is also licensed in United Arab Emirates. Prudential Corporation Asia earns a feebased on assets under management.

Fund innovation is essential in maintaining sales levels and distribution agreements and during 2007Prudential’s operations launched 71 new funds, with two of the larger being India funds for Japan; theIndia Equity Fund and the India Infrastructure Fund. Of the other new funds the China Dragon A ShareEquity Fund in Korea reached its regulatory cap in two weeks and the Asia Pacific REIT in Taiwan hasalso reached its regulatory cap.

Greater deregulation and higher allocations by sovereign wealth and other institutional investors inforeign investments is driving the growth of offshore funds in the market and Prudential is alsodeveloping its institutional asset management business in Asia, winning mandates of £0.5 billion during2007.

The United Arab Emirates operation also made good progress with 13 distribution agreementssigned since launch a year ago and with funds under management of £397 million.

In August 2007, Prudential increased its stake in CITIC Prudential Fund Management, its jointventure with CITIC Group in China from 33 per cent to 49 per cent following approval from regulators.This joint venture launched its first Qualified Foreign Institutional Investor fund in Korea in May 2007and hit its £100 million quota.

Prudential Corporation Asia makes transaction charges (initial and surrender depending on the typeof fund and the length of the investment) and also makes a service charge based on assets undermanagement. The charges vary by country and fund with money market style funds generally having thelowest charges and equity funds the highest.

Net Flows and Funds Under Management

The Asian fund management business had £37 billion of funds under management as atDecember 31, 2007, of which £17.4 billion related to retail funds under management in operations inIndia, Taiwan, Japan, Korea, Malaysia, Singapore, Vietnam, China, Hong Kong and Dubai. Prudential’sasset management business achieved record net inflows for 2007 of £3 billion, up 17 per cent on 2006.The growth in net flows was primarily driven by strong performance in India, Taiwan and Japan.

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US Business

Prudential conducts its US insurance operations through Jackson National Life Insurance Companyand its subsidiaries, including Curian Capital, LLC, a registered investment advisor. The US operationsalso include PPM America, Prudential’s US internal and institutional fund manager, and Prudential’s USbroker-dealer operations (National Planning Corporation, SII Investments, Inc., IFC Holdings, Inc. andInvestment Centers of America, Inc.). At December 31, 2007, Prudential’s US operations hadapproximately three million policies and contracts in effect and PPM America managed approximately£39 billion of assets. In 2007, total new business premiums were £6,534 million.

US Market Overview

The United States is the largest retirement savings market in the world and continues to growrapidly. By mid-2007, total retirement assets in the US exceeded $17.4 trillion, up from $16.5 trillion atthe end of 2006 (Source: Investment Company Institute). As 78 million baby boomers (Source: USCensus Bureau) move into retirement age, these assets are expected to shift from asset accumulation toincome distribution. Currently, $1.6 trillion of assets are generating retirement income. This amount isestimated to grow to $7.3 trillion by 2017 (Source: Financial Research Corporation).

Despite these favourable demographics, US life insurers face challenges from both within andoutside the industry. The industry remains highly fragmented, with the top 15 annuity companies sharingonly 74 per cent of the total market share in 2007 (source: LIMRA). Competition is intensifying throughaggressive price competition. Life insurers also find themselves competing with other financial servicesproviders, particularly mutual fund companies and banks, for a share of US retirement savings assets.

During 2007, the S&P index increased 3.5 per cent (2006: 13.6 per cent), and the US equitymarkets experienced significant volatility during the second half of the year. The S&P index increased6 per cent through June 2007, yet ended the year 2.5 per cent lower than in June and 5.7 per centlower than at the end of October. This volatility and concerns about the US economy are expected toincrease investors’ interest in guarantees on products with equity-based returns.

In addition, for much of 2007, the yield curve was flat and credit spreads were relatively low,resulting in a difficult environment for the sale of profitably priced fixed annuities. During the secondhalf of 2007, the yield began to normalise and credit spreads began to widen, ending closer tonormalised historical levels. The market for fixed annuities was further complicated during the year byartificially high deposit rates offered by banks to attract assets.

Jackson National Life Insurance Company

Jackson is a leading provider of retirement income and savings solutions in the mass andmass-affluent segments of the US market, primarily to those planning for retirement or in retirementalready. It offers tools that help people plan for their retirement, and manufactures products withspecialized features and guarantees to meet customers’ needs. By seeking to add value to both therepresentatives who sell Jackson products, and to their customers, Jackson has built a strong position inthe US retirement savings and income market with the fastest-growing variable annuity franchisemeasured by new sales growth from 2001 to 2007 (source: MARC) and top-10 sales rankings in fixedindex annuities and individual traditional deferred fixed annuities (source: LIMRA).

Jackson’s primary focus is manufacturing profitable, capital-efficient products, such as variableannuities, and marketing these products to advice-based channels through its relationship-baseddistribution model. In developing new product offerings, Jackson leverages a low-cost, flexibletechnology platform to manufacture innovative, customisable products that can be brought to the marketquickly.

Jackson markets its retail products primarily through advice-based distribution channels, includingindependent agents, independent broker-dealer firms, regional broker-dealers, banks and registered

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investment advisors. Jackson also markets life insurance and fixed annuity products through its captiveinsurance agency, which is concentrated in the southeastern United States.

During 2007 significant progress was made against the business priorities which included:

• Continued enhancement and expansion of the existing product offering;

• Continue to take profitable share of variable annuities market;

• Increased penetration of existing distribution channels; and

• Increase share of the US retail asset management market.

Jackson continues to base its success in the evolving US market on industry leading distribution andproduct innovation coupled with sound evaluation of product economics. Jackson’s long-term goalsinclude the continued expansion of its share of the US annuities and retail asset management markets,which it plans to achieve by leveraging its relationship-based distribution advantage in the advice-basedchannels. Growth in Jackson’s share of the US annuities market will be largely contingent uponcontinued enhancement and expansion of the existing product offering, increased penetration of existingdistribution channels and entry into new distribution channels, as well as opportunistic acquisitionactivity.

Innovation in product design and speed to market continue to be key drivers of Jackson’scompetitiveness in the variable annuity market. Jackson believes that high quality, cost-effectivetechnology has allowed Jackson to offer a comprehensive product portfolio that can be customized tomeet the needs of individual customers. Products are offered on an unbundled basis, allowing customersto select those benefits that meet their unique financial needs and pay only for those benefits that theytruly need. This advantage, coupled with distribution through advice-based channels, facilitates Jackson’sability to effectively meet individuals’ long-term retirement savings and income needs. Jackson believesthat leveraging this advantage is a more sustainable long-term strategy than price competition and, as aresult, does not intend to sacrifice product economics for a short-term increase in market share.

Jackson supports its network of independent agents and advisors with award-winning customerservice and marketing support. In 2007, the Service Quality Measurement Group rewarded Jackson withits third World Class Customer Satisfaction Award. Jackson’s marketing campaigns continue to winawards for achievement in graphic design, editorial content and overall communications excellence.

Through organizational flexibility and excellence in execution, coupled with product innovation, asuccessful distribution model and a strong service offering, Jackson increased its share of the USvariable annuity market to 5.1 per cent for full-year 2007 (source: ARC), up from 4.6 per cent for thefull-year 2006.

Jackson continues to expand its product portfolio, adding a variety of new features during 2007.The company enhanced its variable annuity portfolio by adding 20 new underlying investment options,four new guaranteed minimum withdrawal benefits, one new guaranteed minimum income benefit andits first guaranteed minimum accumulation benefit.

In 2007, Jackson also introduced a line of retail mutual funds and launched two new fixed indexannuity products that offer new index options and multiple crediting methods. These additions provideeven more product choices to advisors and create more opportunities to capture a larger portion of theUS retirement market.

Jackson continues to seek bolt-on acquisitions that will complement its long-term organic growthstrategy. Transactions will need to meet or exceed Jackson’s targeted rate of return and will likely be inthe life insurance channel, which provides stable future cash flows. Depending on the opportunities thatbecome available, Jackson may consider utilizing securitization financing for these bolt-on transactions.

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National Planning Holdings (‘‘NPH’’), Jackson’s affiliated independent broker-dealer network, iscomprised of four broker-dealer firms, including INVEST Financial Corporation, Investment Centers ofAmerica, National Planning Corporation, and SII Investments. NPH continues to grow through significantrecruiting efforts. By leveraging its high-quality, state-of-the-art technology, NPH provides its advisorswith the tools they need to operate their practices more efficiently. Through its relationship with NPH,Jackson continues to benefit from an important retail distribution outlet, in addition to receiving valuableinsight into the needs of financial advisors and their clients. NPH increased sales of Jackson’s enhancedproduct offering and the overall distribution of the network during the year. NPH also introduced severaloperational enhancements, which increased the efficiency of its production processes. In addition, NPHexecuted a focused recruitment initiative to expand the total assets under management and therepresentative base of INVEST Financial Corporation.

Curian Capital (‘‘Curian’’), Jackson’s registered investment advisor, provides innovative fee-basedseparately managed accounts and investment products to advisors through a sophisticated technologyplatform. Curian expands Jackson’s access to advisors and provides a complement to Jackson’s coreannuity product lines. During 2007, Curian implemented its Simplified Proposal Process, which allowsfinancial professionals to generate proposals in a matter of minutes, while maintaining the flexibility andcustomization that make separately managed accounts an attractive alternative to traditional investmentvehicles. Curian also expanded its wholesaling force during the year in an effort to accelerate growth.

Products

The following table shows total new business premiums in the United States by product line anddistribution channel for the periods indicated. Total new business premiums include deposits forinvestment contracts with limited or no life contingencies.

Year EndedDecember 31,

2007 2006

£m £m

By ProductAnnuities

Fixed annuitiesInterest-sensitive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 638Fixed index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 554Immediate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 50

Variable annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,554 3,819

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,573 5,061

Life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 25

Institutional productsGICs, funding agreements and Federal Home Loan Bank of Indianapolis (FHLBI)

advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408 458Medium term note funding agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527 437

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935 895

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,534 5,981

By Distribution ChannelIndependent agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 701Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 812 784Broker-dealer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,153 3,593Captive agents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 8Institutional products department . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936 895

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,534 5,981

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Annuities

Fixed Annuities

Interest-sensitive Annuities

In 2007, interest-sensitive fixed annuities accounted for 7 per cent of total new business premiumsand 25 per cent of policyholder liabilities of the US operations interest-sensitive fixed annuities areproducts which allow for tax-deferred accumulation of funds, with flexible payout options. Interest-sensitive fixed annuities are used for asset accumulation in retirement planning and for providing incomein retirement, and offer flexible payout options. The contract holder pays Jackson a premium, which iscredited to the contract holder’s account. Periodically, interest is credited to the contract holder’saccount and administrative charges are deducted, as appropriate. Jackson may reset the interest rate oneach contract anniversary, subject to a guaranteed minimum, in line with state regulations. When theannuity matures, Jackson either pays the contract holder the amount in the contract holder account orbegins making payments to the contract holder in the form of an immediate annuity product. This latterproduct is similar to a UK annuity in payment.

Fixed annuity policies are subject to early surrender charges for the first six to nine years of thecontract. In addition, the contract may be subject to a market value adjustment at the time of surrender.During the surrender charge period, the contract holder may cancel the contract for the surrender value.

Jackson’s profits on fixed annuities arise primarily from the spread between the return it earns oninvestments and the interest credited to the contract holder’s account (net of any surrender charges ormarket value adjustment) less expenses.

Jackson’s fixed annuities continue to be a profitable book of business, benefiting from favorablespread income in recent years. However, the fixed annuity portfolio could be impacted by the continuedlow interest rate environment as lower crediting rates could result in increased surrenders and lowersales as customers seek alternative investment opportunities. However, if customers become more riskaverse to equity-based returns due to recent market volatility, fixed annuities could be viewed as anattractive alternative to variable annuities.

Fixed Index Annuities

Fixed index annuities accounted for 7 per cent of total new business premiums in 2007 and 7 percent of policyholder liabilities of the US operations. Fixed index annuities (formerly referred to as equity-indexed annuities) are similar to fixed annuities in that the contract holder pays Jackson a premium,which is credited to the contract holder’s account and periodically, interest is credited to the contractholder’s account and administrative charges are deducted, as appropriate. Jackson guarantees an annualminimum interest rate, although actual interest credited may be higher and is linked to an equity indexover its indexed option period.

Jackson’s profit arises from the investment income earned and the fees charged on the contract,less the expenses incurred, which include the costs of the guarantees, and the interest credited to thecontract. Fixed index annuities are subject to early surrender charges for the first five to 12 years of thecontract. During the surrender charge period, the contract holder may cancel the contract for thesurrender value.

Fixed index annuities continue to be a profitable product, benefiting from favorable spread and theeffective management of equity risk. The fixed index book provides a natural offsetting equity exposureto the guarantees issued in conjunction with Jackson’s variable annuity products, which allows for anefficient hedging of the net equity exposure.

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Immediate Annuities

In 2007, immediate annuities accounted for 1 per cent of total new business premiums and 2 percent of policyholder liabilities of the US operations. Immediate annuities guarantee a series of paymentsbeginning within a year of purchase and continuing over either a fixed period of years and/or the life ofthe policyholder. If the term is for the life of the policyholder, then Jackson’s primary risk is mortalityrisk. This product is generally used to provide a guaranteed amount of income for policyholders and isused both in planning for retirement and in retirement itself. The implicit interest rate on these productsis based on the market conditions that exist at the time the policy is issued and is guaranteed for theterm of the annuity.

Variable Annuities

In 2007, variable annuities accounted for 70 per cent of total new business premiums and 45 percent of policyholder liabilities of the US operations. Variable annuities are tax-advantaged deferredannuities where the rate of return depends upon the performance of the underlying portfolio, similar inprinciple to UK unit-linked products. They are also used for asset accumulation in retirement planningand to provide income in retirement.

The contract holder can allocate the premiums between a variety of variable sub-accounts with achoice of fund managers and/or guaranteed fixed-rate options. The contract holder’s premiums allocatedto the variable accounts are held apart from Jackson’s general account assets, in a separate account,which is analogous to a unit-linked fund. The value of the portion of the separate account allocated tovariable sub-accounts fluctuates with the underlying investments. Variable annuity policies are subject toearly surrender charges for the first four to seven years of the contract. During the surrender chargeperiod, the contract holder may cancel the contract for the surrender value. Jackson offers one variableannuity that has no surrender charges.

Jackson offers a choice of guaranteed benefit options within its variable annuity product portfolio,which customers can elect and pay for. These include the guaranteed minimum death benefit (‘‘GMDB’’),which guarantees that, upon death of the annuitant, the contract holder or beneficiary receives aminimum value regardless of past market performance. These guaranteed death benefits might beexpressed as the return of original premium, the highest past anniversary value of the contract, or as theoriginal premium accumulated at a fixed rate of interest. In addition, there are three other types ofguarantees: guaranteed minimum withdrawal benefits (‘‘GMWB’’), guaranteed minimum accumulationbenefits (‘‘GMAB’’) and guaranteed minimum income benefits (‘‘GMIB’’). GMWBs provide a guaranteedreturn of the principal invested by allowing for periodic withdrawals that are limited to a maximumpercentage of the initial premium. One version of the GMWBs provides for a minimum annualwithdrawal amount that is guaranteed for the contract holder’s life without annuitization. GMABsgenerally provide a guarantee for a return of a certain amount of principal after a specified period.GMIBs provide for a minimum level of benefits upon annuitization regardless of the value of theinvestments underlying the contract at the time of annuitization. The GMIB is reinsured.

As the investment return on the separate account assets is attributed directly to the contractholders, Jackson’s profit arises from the fees charged on the contracts, less the expenses incurred,which include the costs of guarantees.

In addition to being a profitable book of business in its own right, the variable annuity book alsoprovides an opportunity to utilize the offsetting equity risk among various lines of business to manageJackson’s equity exposure in a cost effective fashion. Jackson believes that the internal management ofequity risk coupled with the utilization of external derivative instruments where necessary, continues toprovide a cost-effective method of managing equity exposure.

Profits in the variable annuity book of business will continue to be subject to the impact of marketmovements both on sales and allocations to the variable accounts and the effects of the economic

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hedging program. While Jackson hedges its risk on an economic basis, the nature and duration of thehedging instruments, which are recorded at fair value through the income statement, will fluctuate andproduce some accounting volatility. Jackson continues to believe that, on a long-term economic basis,the equity exposure remains well managed.

Life Insurance

Reflecting the competitive life insurance market place and the overall trend towards assetaccumulation products, Jackson’s life insurance products accounted for only 0.4 per cent of the totalnew business premiums and 9 per cent of policyholder liabilities of the US operations in 2007. Jacksonsells several types of life insurance, including term life, universal life and variable universal life. Term lifeprovides protection for a defined period of time and a benefit that is payable to a designated beneficiaryupon death of the insured. Universal life provides permanent individual life insurance for the life of theinsured and includes a savings element. Variable universal life is a life insurance policy that combinesdeath benefit protection and the important tax advantages of life insurance with the long-term growthpotential of professionally managed investments. Jackson’s life insurance book has also deliveredconsistent profitability, driven primarily by positive mortality and persistency experience.

Institutional Products

Institutional products consist of guaranteed investment contracts (‘‘GICs’’), funding agreements,including agreements issued in connection with participation in the Federal Home Loan Bank ofIndianapolis (‘‘FHLBI’’) program, and medium term note funding agreements. In 2007, institutionalproducts accounted for 14 per cent of total new business premiums and 12 per cent of policyholderliabilities of US operations. The GICs are marketed by the institutional products department to definedcontribution pension and profit-sharing retirement plans. Funding agreements are marketed toinstitutional investors, including corporate cash accounts and securities lending funds, as well as moneymarket funds, and are issued to the FHLBI in connection with its program. Three types of institutionalproducts are offered:

• Traditional GICs;

• Funding agreements; and

• Medium term note funding agreements.

Traditional Guaranteed Investment Contracts

Under a traditional GIC, the policyholder makes a lump sum deposit. Interest is paid on thedeposited funds, usually on a quarterly basis. The interest rate paid is fixed and is established when thecontract is issued.

Traditional GICs have a specified term, usually two to three years, and typically provide for phasedpayouts. Jackson tailors the scheduled payouts to meet the liquidity needs of the particular retirementplan. If deposited funds are withdrawn earlier than scheduled, an adjustment is made that approximatesa market value adjustment.

Jackson sells GICs to retirement plans, in particular 401(k) plans. The traditional GIC market isextremely competitive. This is due in part to competition from synthetic GICs, which Jackson does notsell.

Funding Agreements

Under a funding agreement, the policyholder either makes a lump-sum deposit or makes specifiedperiodic deposits. Jackson agrees to pay a rate of interest, which may be fixed but which is usually afloating short-term interest rate linked to an external index. Interest is paid quarterly to the policyholder.

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The average term for the funding agreements is one to two years. At the end of the specified term,policyholders may re-deposit the principal in another funding agreement. Jackson makes its profit on thespread between the yield on its investment and the interest rate credited to policyholders.

Typically, brokerage accounts and money market mutual funds are required to invest a portion oftheir funds in cash or cash equivalents to ensure sufficient liquidity to meet their customers’requirements. The funding agreements permit termination by the policyholder on 7 to 90 days notice,and thus qualify as cash equivalents for the clients’ purposes. Funding agreements terminable by thepolicyholder with less than 90 days notice account for less than 0.3 per cent of Jackson’s totalpolicyholder reserves.

In 2005, Jackson became a member of the FHLBI. Membership allows Jackson access to advancesfrom FHLBI that are collateralized by mortgage related assets in Jackson’s investment portfolio. Theseadvances are in the form of funding agreements issued to FHLBI. In 2007, the total premiums generatedfrom advances from the FHLBI were $800 million.

Medium Term Note Funding Agreements

Jackson has also established European and global medium-term note programs. The notes offeredmay be denominated in any currency with a fixed or floating interest rate. Notes are issued toinstitutional investors by a special purpose vehicle and are secured by funding agreements issued byJackson.

Distribution and Marketing

Jackson distributes products in all 50 states of the United States and in the District of Columbia,although not all products are available in all states. Operations in the state of New York are conductedthrough a New York insurance subsidiary.

Jackson focuses on independent distribution systems and it supports its network of independentagents and advisors with education and training programs.

Independent Agents and Broker-Dealers

Jackson’s subsidiary, Jackson National Life Distributors, LLC (‘‘JNLD’’), is the primary marketing anddistribution organization for annuities and life insurance products. The insurance and fixed annuityproducts are distributed through independent agents located throughout the United States. Theseapproximately 20,000 appointed insurance agents or brokers, who also may represent other companies,are supported by four regional marketing divisions. JNLD generally deals directly with writing agents andbrokers thereby eliminating intermediaries, such as general agents. This distribution channel has enabledit to generate significant volumes of business on a low, variable cost basis. Jackson is responsible forproviding agents with product information and sales materials.

JNLD’s wholesalers meet directly with broker-dealers and financial planners and are supported by anextensive internal sales staff. There are more than 700 active selling agreements with regional andindependent broker-dealer organizations throughout the United States, which provides Jackson access tomore than 74,000 appointed agents.

Jackson is responsible for providing training for its broker-dealer partners and providing them withproduct information and sales materials.

Banks, Credit Unions and Other Financial Institutions

Jackson’s Institutional Marketing Group distributes annuity and life insurance products throughbanks, credit unions and other financial institutions and through third-party marketing organizations thatserve these institutions. Jackson is a leading provider of annuities offered through banks and credit

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unions and can access more than 17,000 financial institution representatives through existingrelationships with banks and credit unions. Jackson has established distribution relationships withmedium-sized regional banks, which it believes are unlikely to develop their own insurance productcapability.

Independent Broker-Dealers

Jackson’s retail distribution is managed by Prudential’s independent broker-dealer network, NPH,which is made up of four firms, National Planning Corporation, SII Investments, Inc., INVEST FinancialCorporation and Investment Centers of America, Inc. NPH had approximately 3,000 registeredrepresentatives at the end of 2007.

Registered Investment Advisor

Commencing operation in early 2003, Curian Capital, LLC (Jackson’s registered investment advisorchannel) provides innovative fee-based separately managed accounts and investment products toadvisors through a sophisticated technology platform.

The registered investment advisor industry began as a service offered to very high net worthinvestment clients, focusing on platforms rather than specific products, and providing institutional-qualitymanagement, custom portfolios and tax services. The industry has evolved to offer personalizedinvestment advice, very high quality money management, good returns and reasonable costs to abroader range of clients.

Institutional Products Department

Jackson markets its institutional products through its institutional products department. It has directcontacts with banks, municipalities, asset management firms and direct plan sponsors. Institutionalproducts are distributed and marketed through intermediaries to these groups.

Captive Agency

In connection with the acquisition of Life of Georgia in 2005, Jackson established the JNL SoutheastAgency (‘‘JNLSA’’), the Company’s first captive agency since 1970. JNLSA, with approximately 100 lifeinsurance agents, was formed to help retain the Life of Georgia book of business and to create a newdistribution channel for Jackson’s life insurance products.

Factors Affecting Pricing of Products and Asset Liability Management

Jackson prices products based on assumptions about future mortality, investment yields, expensesand persistency. Pricing is influenced by its objectives for return on capital and by competition.Although Jackson includes a profit margin in the price of its products, the variation between theassumptions and actual experience can result in the products being more or less profitable than it wasassumed they would be. This variation can be significant.

Jackson designs its interest-sensitive products and conducts its investment operations to closelymatch the duration of the assets in its investment portfolio with the annuity, term life, whole life,universal life and guaranteed investment contract product obligations. Jackson seeks to achieve a targetspread between what it earns on its assets and what it pays on its liabilities by investing principally infixed-rate securities and in options and futures to hedge equity-related movements in the value of itsproducts.

Jackson segregates its investment portfolio for certain investment management purposes and as partof its overall investment strategy into four portfolios: fixed annuities without market value adjustment,fixed annuities with market value adjustment, fixed index annuities and institutional liabilities. Theportfolios backing fixed annuities with and without market value adjustments and the fixed index

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annuities have similar characteristics and differ primarily in duration. The portfolio backing theinstitutional liabilities has its own mix of investments that meet more limited duration tolerances.Consequently, the institutional portfolio is managed to permit less interest rate sensitivity and has limitedexposure to mortgage-backed securities. At December 31, 2007, 10 per cent of the institutionalportfolio was invested in residential mortgage-backed securities.

The fixed-rate products may incorporate surrender charges, market value adjustments, two-tieredinterest rate structures or other limitations relating to when policies can be surrendered for cash, inorder to encourage persistency. At December 31, 2007, 73 per cent of Jackson’s fixed annuity reserveshad surrender penalties or other withdrawal restrictions. Substantially all of the institutional portfolio hadwithdrawal restrictions or market value adjustment provisions.

Fixed index annuities issued by Jackson also include an equity component that is hedged usingequity options and futures contracts issued on the corresponding exchange. The equity component ofthese annuities constitutes an embedded derivative under IAS 39, ‘‘Financial Instruments: Recognitionand Measurement’’ that is carried at fair value, as are other derivative instruments.

Guaranteed benefits issued by Jackson in conjunction with the sales of variable annuity contractsexpose Jackson to equity risk as the benefits generally become payable when equity markets declinebelow the guaranteed amount. Certain of these benefits are carried at fair value under IAS 39 withchanges in fair value recorded in income. Jackson hedges the tail risk associated with the equityexposure using equity options and futures contracts, which are also carried at fair value under IAS 39.As Jackson has not explicitly hedged its fair value risk and certain benefits have mortality risk and aretherefore precluded from being carried at fair value, the income statement includes a timing mismatchdue to changes in fair value.

Reserves

Except for certain non-insurance deposit type accounts and as allowed under IFRS, Jackson usesreserves established on a US GAAP basis as the basis for consolidation into Prudential’s IFRS accounts.

For the fixed and variable annuity contracts and institutional products, the reserve is thepolicyholder’s account value. For the immediate annuities, reserves are determined as the present valueof future policy benefits. Mortality assumptions are based on the 1983a Individual Annuitant MortalityTable and the Annuity 2000 Mortality Table for newer issues. Interest rate assumptions currently rangefrom 2.0 per cent to 9.0 per cent.

For the traditional term life contracts, reserves for future policy benefits are determined using thenet level premium method and assumptions as to mortality, interest, policy persistency and expenses.Mortality assumptions are generally from 25 per cent to 160 per cent of the 1975-1980 Basic Select andUltimate tables, depending on underwriting classification and policy duration. Interest rate assumptionsrange from 4.0 per cent to 8.0 per cent. Persistency and expense assumptions are based on Jackson’sexperience.

For the interest-sensitive and single premium life contracts, reserves approximate the policyholder’saccount value.

Reinsurance

Jackson reinsures portions of the coverage provided by its life insurance products with otherinsurance companies under agreements of indemnity reinsurance. Reinsurance assumed from othercompanies is not material.

Indemnity reinsurance agreements are intended to limit a life insurer’s maximum loss on a large orunusually hazardous risk or to obtain a greater diversification of risk for the life insurer. Indemnityreinsurance does not discharge the original insurer’s primary liability to the insured. Jackson’s reinsured

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business is ceded to numerous reinsurers and the amount of business ceded to any one reinsurer is notmaterial. Typically, the reinsurers have an AM Best Co rating of A or higher.

Jackson limits the amount of risk it retains on new policies. Currently, the maximum risk that isretained on new policies is $2.0 million. Jackson is not a party to any risk reinsurance arrangement withany reinsurer pursuant to which the amount of reserves on reinsurance ceded to such reinsurer equalsmore than 1 per cent of total policy reserves.

Beginning in late 1995, Jackson entered into reinsurance agreements to cede 80 per cent of its newlevel premium term life insurance business written in the United States to take advantage of competitivepricing in the reinsurance markets. Beginning January 1, 1999, it began to cede 90 per cent of newwritings of level premium term products. Jackson intends to continue to cede a significant proportion ofnew term life insurance business for as long as pricing in the reinsurance markets remains favorable.

Effective from December 31, 2002, Jackson cedes the guaranteed minimum death benefit coverageassociated with certain variable annuities issued prior to December 31, 2002 to an affiliate, PrudentialAtlantic Reinsurance Company (‘‘PARC’’), Dublin, Ireland. PARC is consolidated into the Group’s financialstatements.

Jackson cedes the guaranteed minimum income benefit on variable annuities to an unaffiliatedreinsurer.

Policy Administration

Jackson provides a high level of administrative support for both new and existing policyholders.Jackson’s ability to implement new products quickly and provide customer service is supported byintegrated computer systems that issue and administer complex life insurance and annuity contracts.Jackson continues to develop its life insurance administration and underwriting systems and its fixed andvariable annuity administration systems to enhance the service capabilities for both new and existingpolicies.

PPM America

PPM America is Prudential’s US fund management operation, with offices in Chicago and New York.Its primary focus is to manage funds for Jackson and therefore the majority of funds under managementare fixed interest in nature. PPM America has also launched a number of institutional high yield andspecial investment vehicles to leverage their fund management capabilities into new areas. PPM Americaalso serves as investment advisor for certain mutual funds, several private investment funds andstructured finance vehicles, and the US equity and fixed income portion of portfolios of certain affiliateswithin Prudential.

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UK Business

Introduction

As at December 31, 2007, Prudential’s UK business was structured into two business units, eachfocusing on its respective target customer markets. Prudential’s UK business units are UK InsuranceOperations and M&G.

The following discussion describes:

• the UK retail financial services market;

• Prudential’s UK business units, products and distribution channels;

• Prudential’s reinsurance arrangements and reserving practice; and

• shareholders’ participation in Prudential’s long-term insurance business.

In 2007, Prudential’s UK business generated new business insurance premiums of £6,866 millionand gross investment inflows of £14,745 million. As of December 31, 2007, M&G had over £167 billionfunds under management. See ‘‘—M&G’’ below for an analysis and description of this asset managerand its funds under management.

UK Retail Financial Services Business Overview

In 2007, Prudential UK continued its strategy of selectively competing in areas of the retirementsavings and income markets where it believes it can generate attractive returns.

The UK business remains focused on maximizing value from the opportunity afforded by the fastgrowing need for retirement solutions. With an ageing population and the concentration of UK wealth inthe mass affluent and high net worth sectors, the retirement and near-retirement population is expectedto represent the fastest growing segments of the market over the next 10 years. Low savings rates andhigh levels of consumer debt, combined with a shift in responsibility for providing income duringretirement from Government and employers towards individuals, have resulted in individuals beinginadequately provided for during increasingly long periods of retirement. These consumers will,Prudential believes, have a need for high quality financial advice and service and are increasinglyseeking guarantees and longevity protection from their financial products.

Prudential UK has a unique combination of competitive advantages, including its significantlongevity experience, multi-asset management capabilities and its brand and financial strength. These putit in a strong position to pursue its value driven strategy in its two principal businesses: Retail andWholesale.

Prudential UK’s Retail business is focusing on savings and income for those customers nearing or inretirement. Its retirement income business aims to continue to drive profitable growth in its coreannuities operation and grow its presence in the equity release market. The significant 25-year pipelineof internal vestings annuity business from maturing individual and corporate pensions policies isenhanced by strategic partnerships with third parties, where Prudential UK is the recommended annuityprovider for customers vesting their pension at retirement. This scale enables its selective value-basedparticipation in the external vestings market. Annuities remain core drivers of the sales and profitderived by Prudential UK, which now has approximately 1.5 million annuities in payment.

Prudential UK remains a market leader in the with-profits market. These products offer a medium tolong-term, medium risk investment with exposure to a diverse range of assets that is particularlyimportant to many customers against the backdrop of market uncertainty.

In the Retail accumulation business, Prudential UK continues to be a market leader in the corporatepensions market where it is a provider to over 20 per cent of FTSE 350 companies and the largest

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provider of pension schemes to the UK public sector. Prudential now administers corporate pensions forover 600,000 members.

In addition, the Retail business has used its brand and strength with Discovery to build brandeddistribution in Health and Protection, further using the joint venture to access Discovery’s Vitalityconcept and lifestyle protection capabilities.

Prudential UK’s strategy in the Wholesale market is to participate selectively in bulk annuity andback-book buy-outs, where Prudential UK is well placed to win business based on its financial strength,superior track record, market leading investment capability as well as its extensive annuitant mortalityrisk assessment capabilities. The Wholesale business, which has been in operation for over 10 years andhas already written more than 400 bulk buy-outs, has a strong track record in the risk management ofpension schemes for corporate clients and insurers wishing to reduce or eliminate their investment orlongevity liabilities. Prudential UK intends to maintain a strict focus on value, only participating intransactions that generate an acceptable rate of return.

Current year initiatives

Prudential UK’s key priorities in 2007 were:

• Maintaining leadership position in individual annuities;

• Building share of the equity release market;

• Growing the volume of products that utilize Prudential’s multi-asset management expertise;

• Deepening relationships with chosen distributors including the introduction of customer-agreedremuneration across some product lines;

• Realigning cost base to the selective business strategy; and

• Delivering wholesale transactions with attractive rates of return.

During 2007, Prudential UK maintained its market leadership in individual annuities, where it hascontinued to create value by maintaining high retention rates. This has been augmented by partnershipdeals with insurers such as Zurich, Royal London and Save and Prosper. Prudential UK also announced anew partnership with Barclays, where Prudential will be the preferred supplier of conventional annuityproducts to their retail customers in the UK.

The agreement announced in 2007 with Capita to outsource a large proportion of Prudential’sin-force and new business policy administration is another important milestone for the UK business. Thisagreement is expected to deliver £60 million per annum of savings to Prudential UK, and is an importantelement in achieving its total cost savings target of £195 million. The contract is expected to result inapproximately 3,000 employees transferring to Capita and help the UK deliver its long-term cost savingsstrategy by removing fixed costs from the business and achieving significant operating efficiencies. Thisshould provide a significant reduction in long-term expense risk by providing certainty on per-policycosts as the number of policies in the mature life and pensions book decreases over the coming years.Unit costs per policy are expected to reduce by over 30 per cent by 2011.

Within the UK, as part of its continuing aim to maintain a cost effective platform for growth,Prudential has committed to realizing substantial annualized pre tax cost savings of £195 million savingsper annum by 2010. By the end of 2007 £115 million of the cost saving target had been delivered. Theremaining £80 million per annum, including the £60 million generated from the Capita contract, isexpected to be delivered by the end of 2010.

In December, Prudential completed the transfer of Equitable Life’s portfolio of in-force with-profitsannuities. This book covers approximately 62,000 policies with assets of approximately £1.74 billion.

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This deal grows Prudential’s with-profits business and creates value for both Equitable Life policyholdersand Prudential’s shareholders and policyholders.

UK Products and Profitability

In common with other UK long-term insurance companies, Prudential’s products are structured aseither with-profits (or participating) products, or non-participating (including unit linked) products.Depending upon the structure, the level of shareholders’ interest in the value of policies and the relatedprofit or loss varies.

With-profits policies are supported by a with-profits sub-fund and can be single premium (forexample, Prudence Bond) or regular premium (for example, certain corporate pension products).Prudential’s primary with-profits sub-fund is part of Prudential Assurance Company’s (‘‘PAC’’) long-termfund. The return to shareholders on virtually all with-profits products is in the form of a statutorytransfer to PAC shareholders’ funds which is analogous to a dividend from PAC’s long-term fund and isdependent upon the bonuses credited or declared on policies in that year. Prudential’s with-profitspolicyholders currently receive 90 per cent of the distribution from the main with-profits sub-fund asbonus additions to their policies and shareholders receive 10 per cent as a statutory transfer.

The profits from almost all of Prudential’s new non-participating business accrue solely toshareholders. Such business is written in the non-profit sub-fund within PAC’s long-term fund, or invarious shareholder owned direct or indirect subsidiaries, the most significant of which is PrudentialRetirement Income Limited (‘‘PRIL’’), which also writes all new immediate annuities arising from vestingdeferred annuity policies in the with-profits sub-fund of PAC. There is a substantial volume of in-forcenon-participating business in PAC’s with-profits sub-fund and that fund’s wholly owned subsidiaryPrudential Annuities Limited (‘‘PAL’’), which is closed to new business; profits from this business accrueto the with-profits sub-fund.

The defined charge participating sub-fund (‘‘DCPSF’’) forms part of the Company’s long-term fundand comprises the accumulated investment content of premiums paid in respect of the defined chargeparticipating with-profits business issued in France, the defined charge participating with-profits businessreassured into the Company from Prudential International Assurance plc and Canada Life (Europe)Assurance Ltd and the with-profits annuity business transferred to the Company from the Equitable LifeAssurance Society on December 31, 2007. All profits in this fund accrue to policyholders in the DCPSF.

Products

The traditional life insurance product offered by UK life insurance companies was a long-termsavings product with a life insurance component. The life insurance element conferred tax advantagesthat distinguished the traditional life insurance products offered in the United Kingdom from the savingsproducts offered by banks, building societies and unit trust companies. The gradual reduction of thesetax advantages and increasing sales of single premium life products have resulted in the distinctionbetween life insurance and other long-term savings products becoming less important. Pension productsremain tax-advantaged within certain limits.

Prudential expects demand for private personal pension and savings products to increase over themedium to long term, in part reflecting a change in the UK government’s approach to social securitythat has encouraged long-term savings through tax advantages, but also in reaction to the growingrealization that state provided pensions are unlikely to provide sufficient retirement income. An ageingpopulation is focusing on asset accumulation and other retirement products to supplement their statebenefits, while younger generations are focusing on pension and long-term savings products as well ashealth and income protection cover.

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Distribution

Retail financial services and products are distributed face to face, through branches, tied agents,company sales forces and financial advisors, or directly by mail, telephone and over the internet. Tiedagents are exclusive agents who represent only one insurer and must offer customers the products mostsuitable to their needs, but only from the range of products offered by that insurer. In recent years thehigh costs of company sales forces and tied agency networks, combined with customers perceiving alack of choice, have meant that sales forces and tied agents have lost significant market share tofinancial advisors, with the result that many insurers, including Prudential, have chosen to close thesetied agents and direct sales force networks. With the aim of meeting the perceived demand for face toface advice when purchasing equity release products, Prudential established a face to face sales team forits life time mortgage product in late 2006. There are currently 40 advisors, with plans to hire more ifdemand increases.

Direct and e-commerce distribution methods are generally lower-cost than other methods but havenot been conducive to providing financial advice to the consumer to date. Accordingly, productsdistributed directly are generally more straightforward and have lower, often fee-based, charges.

Previously, IFAs were required by the UK polarization laws to provide ‘‘best advice’’ to customers,considering all of the products available in the market and the customer’s particular circumstances, andwere legally responsible for their own advice. In contrast, company sales forces could only sell theproducts of the company they were employed by, but nevertheless had to provide ‘‘best advice’’ in lightof the customer’s particular circumstances. A company had legal responsibility for the advice its salesforce provided and the conduct of its tied agents.

The FSA announced a relaxation of the polarization rules in March 2001 with respect to stakeholderpension schemes and direct offer financial promotions for packaged products (which include life policiesother than pure protection policies, pensions, regulated collective investment schemes and investmenttrust savings schemes). As a result of these changes, tied sales forces and appointed representatives ofproduct provider firms are now free to market stakeholder pensions manufactured by any othercompany.

The FSA, following a consultation process, implemented new ‘‘depolarization’’ rules at the end of2004. Advisors now have the choice of being ‘‘single tied’’ as before, or multi-tied advising on theproducts of a limited range of providers, or equivalent to an IFA where they offer products from the‘‘whole of market’’ as now, but they also have to offer a ‘‘fee alternative’’, a fee-based charging structureas an alternative to commission. Prudential worked with major financial advisor groups to design andbuild multi tie propositions and has been appointed to a number of multi-tie panels of these majorfinancial advisor groups.

The FSA is conducting a review of the retail distribution marketplace. Prudential welcomes thepublication of the FSA’s Retail Distribution Review (‘‘RDR’’) discussion papers, which outline a number ofpotential changes designed to encourage greater levels of transparency, professionalism andsustainability, with the prime aim of increasing consumers’ access to savings and their understanding ofthe value of advice. Prudential is encouraged that the concept of consumer agreed remuneration hasbeen included as part of the Review and believes that this is an excellent opportunity to put in place aframework that will better align the interests of consumers, advisers and providers.

As of December 31, 2007, Prudential UK Insurance Operations distributes its products through thefollowing channels:

Direct and Partnerships

The direct distribution channel is primarily charged with increasing revenue from existing Prudentialcustomers and by seeking new customers. Direct distribution channels include the telephone, internet

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and face to face advisors and focuses on annuities, investments, protection, health products and lifetimemortgages. Partnerships focuses on developing strong relationships with banks, retail brands and otherdistributors. Partnerships also seeks to help Prudential’s distribution partners in their distribution andproduct development strategies. Prudential now has a range of providers including Barclays, RoyalLondon Mutual, Zurich Financial Services, Openwork, Save and Prosper, National Australia Bank &St James Place. Prudential also has a partnership with Boots through its PruHealth joint venture.

Wholesale

In December 2007, Prudential completed the transfer of Equitable Life’s portfolio of in-forcewith-profits annuities. This book covers approximately 62,000 policies with assets of approximately£1.74 billion. The completion of this transaction increased Prudential’s with-profits business and isexpected to create value for both Equitable Life policyholders and Prudential’s shareholders andpolicyholders.

In 2006 Prudential UK completed two significant back book transactions. In January 2006 it reachedagreement with Royal London to acquire the portfolio of in-payment pension annuities that had beenwritten primarily under the Royal London brand, but which also included some annuities that had beenwritten under the Refuge Assurance brand. The transaction generated premium income of approximately£660m. In June 2006, PAC agreed to reinsure the non-profit immediate annuity portfolio of the ScottishAmicable Insurance Fund (‘‘SAIF’’) to PRIL. SAIF is a closed sub-fund established by a court-approvedScheme of Arrangement in September 1997, in which Prudential shareholders have no economicinterest. It contains a large proportion of the business originally written by the Scottish Amicable LifeAssurance Society that was acquired by PAC in September 1997. The reinsurance premium for thistransaction was approximately £560m.

Intermediaries

In the second half of 2006, Prudential began a transformation program within its IntermediatedDistribution area which it believes will create a significant advantage in the market through its methodsof distribution and the skills of its people. Key developments that the program introduced to enhancetheir sales process through the use of management information are a new segmentation model based onvalue and a regional account focus to get closer to the external market.

UK Business Units

Long-term Products

Prudential’s long-term products in the United Kingdom consist of life insurance, pension productsand pensions annuities. The following table shows Prudential’s UK Insurance Operations new business

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insurance and investment premiums by product line for the periods indicated. New business premiumsinclude deposits for policies with limited or no life contingencies.

Year EndedDecember 31,

2007 2006

(in £ millions)

Life insuranceWith-profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 406 250Unit-linked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 899 1,765

Total life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,305 2,015Pensions

With-profits individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 34Unit-linked individual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 93Department of Work and Pensions rebates . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 161Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680 745

Total pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 932 1,033Pension annuities and other retirement products

Fixed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,742 2,439Retail Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 659 1,338With-profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,228 367

Total pension annuities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,629 4,144

Total new business premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,866 7,192

Life Insurance Products

Prudential’s UK life insurance products are predominantly medium to long-term savings productswith life cover attached, and also include pure protection (term) products. The main savings productsPrudential offers are investment bonds.

Savings Products—Investment Bonds

Prudential offers customers a choice through a range of investment funds to meet different risk andreward objectives. Prudential launched the Flexible Investment Plan (‘‘FIP’’) in November 2003. Throughthis plan, its customers have the option to invest in the With-Profits fund or in a range of unit linkedinvestment funds. Advisors can build an individual portfolio and asset allocation model to accuratelymatch a client’s risk / reward profile. FIP also gives financial advisors the opportunity to choose fromdifferent external fund management groups and the flexibility to make changes to portfolio and assetallocation over time. In 2007, sales of the unit-linked option of FIP were £223 million.

The Prudence Bond, a single premium, unitized with-profits policy with no fixed term, is one of theUnited Kingdom’s leading investment bond products in terms of with-profits market share In September2004, Prudential launched the next generation with-profits investment bond, entitled PruFund. Areplacement for Prudence Bond it is designed to provide increased transparency and smoothedinvestment returns to the customer. In 2007, total new business premiums attributable to PruFund were£188 million. Sales of Prudential’s offshore bonds, the International Prudence Bond and InternationalPrudential Portfolio Bond, were £430 million in 2007.

With-profits products aim to provide capital growth over the medium to long-term, and access to arange of investment sectors without the costs and risks associated with direct investment into thesesectors. Capital growth for the policyholder on with-profits bonds apart from PruFund is achieved by theaddition of reversionary or regular bonuses, which are credited to the bond on a daily basis from

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investment returns achieved within Prudential Assurance’s long-term with-profits fund, off-set by chargesand expenses incurred in the fund. A final bonus may also be added when the bond is surrendered.PruFund delivers growth through a published expected growth rate, updated quarterly, and atransparent formulaic smoothing mechanism. In contrast the capital return on unit-linked bonds directlyreflects the movement in the value of the assets underlying those funds. When funds invested inPrudential Assurance’s long-term with-profits fund are either fully or partially withdrawn, Prudential mayapply a market value adjustment to the amount paid out.

In a relatively volatile investment market there has been a marked increase in demand for cautiousmanaged solutions providing enhanced returns. In February 2007, Prudential UK launched the CautiousManaged Growth Fund and the Managed Defensive Fund, using Prudential’s strengths in investmentexpertise and its disciplined approach to asset allocation. These funds have the potential to offer abetter longer-term return than a bank or building society account and allow the customer to access realreturns with lower volatility. These funds are available across the full tax wrapper suite, includingonshore and offshore bonds, individual pensions and mutual funds.

Prudential launched the Prudential Investment Plan (‘‘PIP’’), an investment bond with customeragreed remuneration, in August 2007. PIP includes a selected range of investment solutions, offeringboth with-profits and unit-linked options, including the recently launched Cautious Managed Growth andManaged Defensive Funds, which utilize Prudential’s core asset allocation expertise. These two fundshave generated strong relative and absolute investment returns since they were launched and areavailable across the full tax wrapper suite, including onshore and offshore bonds, individual pensionsand mutual funds.

During 2007, Prudential UK introduced customer-agreed remuneration across some of its otherproduct lines. Under this model, financial advisors agree their remuneration directly with the customerand not with the product provider and in doing so make commission structures far more transparent.This is in line with Prudential UK’s focus on building strong long-term relationships with advisors as wellas offering market-leading retirement solutions.

Life Protection

In October 2004 Prudential launched PruHealth, a UK healthcare product that links health andfitness to the cost of medical insurance. PruHealth premium income is not reported as long-term newbusiness sales. Support for PruHealth is strong in both the intermediaries channel and the direct toconsumer channel. The product has been developed through a joint venture with Discovery of SouthAfrica.

PruHealth continued to grow strongly with gross written premiums of £64 million in 2007, up80 per cent on 2006. This business continues to progress and now insures 142,000 people, reflecting anemphasis on individual and SME (small-and-medium-enterprise) business, success in introducing newdistribution deals, a focus on high quality corporate schemes and a strong renewal rate among individualcustomers. Tied regional broker networks have recently been established to enhance our distributioncoverage.

Prudential also underwrites life protection for companies providing loans to their customers. Sales in2006 were £687 million mostly generated through Prudential’s partnership agreements with Lloyds TSBand Alliance and Leicester. Sales in 2007 were £21million, mainly because the partnership deals withLloyds TSB and Alliance and Leicester had ceased.

Prudential UK and its South African joint venture partner, Discovery, launched PruProtect inSeptember 2007. This is an innovative new protection insurance product offering customers life cover,income protection and severity-based serious illness cover.

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Pension Products

Prudential provides both individual and corporate pension products. In 2007, new businesspremiums totaled £109 million for individual pensions and £680 million for corporate pensions. Pensionproducts are tax-advantaged long-term savings products that comply with rules established by the UKInland Revenue and are designed to supplement state-provided pensions. These rules require that, uponretirement, maturity benefits are used to purchase pension annuities by policyholder election atretirement or at least by the age of 75, although they do permit a portion to be taken as a tax-free lumpsum. Prior to retirement, these products typically have minimal mortality risk to Prudential and areprimarily considered investment products. An exception is where a guaranteed annuity option has beenoffered on the product, with an element of risk to Prudential both in underlying mortality andinvestment assumptions.

Prudential ceased marketing Guaranteed Annuity Options (‘‘GAOs’’) in 1987, but for a minority ofcorporate pension schemes GAOs still apply for new members. Current liabilities for this type ofbusiness make up less than 1 per cent of the with-profits sub-fund.

Many of the pension products Prudential offers are with-profits products or offer the option to haveall or part of the contributions allocated to a with-profits fund. Where funds invested in the with-profitsfund are withdrawn prior to the pension date specified by the policyholder, Prudential may apply amarket value adjustment to the amount paid out. The remaining pension products are non-participatingproducts, which include unit-linked products.

Individual Pensions

Prudential’s individual pension range offers unit-linked and unitized with-profits products.

In 2001, Prudential introduced products that meet the criteria of the UK government’s stakeholderpension program. The stakeholder pension is intended for individuals earning enough to be able toafford to make contributions to a pension but who are not currently doing so. The introduction ofstakeholder pensions has had implications for, among other things, how Prudential designs, administers,charges for and distributes pension products. The most significant requirements involve capped chargesand a low minimum contribution which must be accepted by the provider. The government has cappedcharges at 1.5 per cent per annum of the policyholder account balance for stakeholder pensions for thefirst ten years, decreasing to 1 per cent thereafter, which is below the charges on personal pensionproducts previously offered by the UK pensions industry.

Department of Work and Pensions Rebates (‘‘DWP Rebate’’)

Prudential also provides individual personal pension products through the DWP Rebatearrangement. Under this arrangement, individuals may elect to contract out of the UK’s State SecondPension (referred to as S2P) which was previously known as State Earnings Related Pension Scheme,administered by the UK Department of Work and Pensions. If an individual elects to contract out, thenhe or she will designate a pension provider, such as Prudential. Premiums on products sold in thismanner are paid through ‘‘rebates’’ from the Department of Work and Pensions, which represent theamount that would be otherwise paid into S2P. Rebate amounts are invested to provide benefits to theindividual. Premiums from Department of Work and Pensions rebates are typically reported in the firstquarter of each year.

Corporate Pensions

There are two categories of corporate pension products: defined benefit and defined contribution.Prudential has an established defined benefit plan client base covering the small to medium-sizedemployer market. Prudential’s defined contribution client base ranges from small-unlisted companies to

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some of the largest companies in the United Kingdom as well as a number of clients in the public sector(in particular the Additional Voluntary Contribution Sector). Additional Voluntary Contribution plansenable employees to make additional pension contributions, either regularly or as a lump sum, tosupplement their occupational pension plans.

Defined benefit plans and products continue to dominate the corporate pensions market in terms offunds under management. In recent years, however, most new plans established have been definedcontribution products. In addition, there is an increasing trend among companies to close the definedbenefit plans to new members or to convert existing schemes from defined benefit to definedcontribution in order to stabilize or reduce potential pension liabilities.

Prudential offers group unit linked policies and with-profits policies to the corporate pensionsmarket. Prudential’s defined contribution products are Additional Voluntary Contribution plans, GroupMoney Purchase Plans, Group Personal Pension plans, Group Stakeholder Pension plans and ExecutivePension plans.

Prudential also has a Company Pension Transfer Plan (or Bulk S32), designed to accept benefitsfrom both defined benefit and defined contribution pension schemes which are winding-up (cease toexist or being replaced by a new type of scheme).

Pension Annuities and other retirement products

Prudential offers individual conventional immediate annuities that are either fixed or retail priceindexed (referred to as RPI), where annuity payments are guaranteed from the outset, or with-profitsannuities, where annuity payments are variable dependent on the investment performance of underlyingassets. A total of £2,830 million of individual annuities were sold in 2007. Of this total, £1,399 millionwere sold to existing Prudential customers with maturing pension policies. The other £1,431 millionwere sold to new customers, typically individuals with a pension maturing with another provider whochose Prudential to provide their annuity. Prudential also offers bulk annuities, whereby it manages theassets and accepts the liabilities, of a company pension scheme, usually when it is being wound up bythe employer. Due to the nature of the product, the volume of Prudential’s bulk annuity sales isunpredictable as it depends on the decision of scheme trustees. In 2007, Prudential sold £1,799 millionof bulk annuities.

Prudential’s immediate annuity products provide guaranteed income for a specified time, usually thelife of the policyholder, in exchange for a lump-sum capital payment. No surrender value is availableunder any of these products. The primary risks to Prudential from immediate annuity products,therefore, are mortality improvements and credit risk.

Conventional Annuities

Prudential’s conventional annuities include level (non-increasing), fixed increase and retail priceindex (‘‘RPI’’) annuities. Prudential’s fixed increase annuities incorporate automatic increases in annuitypayments by fixed amounts over the policyholder’s life. The RPI annuities provide for a regular annuitypayment to which an additional amount is added periodically based on the increase in the UK RetailPrices Index. In 2007, sales of RPI annuities were £659 million (including £11 million of bulk annuities).In 2007, sales of level and fixed increase annuities amounted to £1,742 million (including £43 million ofbulk annuities and £28 million of unit-linked Flexible Retirement Income Account products (‘‘FRIA’’)).

With-profits Annuities

Prudential is one of only a few companies in the United Kingdom in the with-profits annuitiesmarket. In 2007, Prudential’s premiums for this business were £2,228 million, including £1,745 millionfrom the transfer of Equitable Life’s portfolio of in-force with-profits annuities. Prudential’s with-profits

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annuities combine the income features of annuity products with the investment smoothing features ofwith-profits products and enable policyholders to obtain equity-type returns over time. Policyholdersselect an ‘‘anticipated bonus’’ from the specific range Prudential offers for the particular product. Thevalue of the annuity payment each year depends upon the anticipated bonus rate selected by thepolicyholder when the product is purchased and the bonuses Prudential declares each year during theterm of the product. If bonus rates fall below the anticipated rate, then the annuity income falls.

Capitalizing on the need for inflation protection in retirement, Prudential has an 87 per cent marketshare of the with-profits annuity market as of December 31, 2007 (source: ABI). Early in 2007Prudential made a number of product enhancements including the facility to accept Protected Rightsmonies, which was a first in the with-profit annuity market.

Income drawdown

In the fourth quarter of 2007, Prudential UK launched an income drawdown product. This producthelps customers manage their pension through the various stages of retirement, and offers flexibilitywhilst providing potential for growth through investment. Together with the Flexible Lifetime Annuitythis gives Prudential a full range of retirement income solutions.

Flexible Retirement Income Account

FRIA offers customers a flexible retirement solution and consists of two separate products. TheFlexible Income Drawdown Plan (‘‘FIDP’’) offers wide investment choice, income flexibility and optionson death, including the repayment of the remaining fund as a lump sum. Under the current rules forapproval of pension schemes, customers can use this draw-down product to provide retirement incomeup to age 75. These rules require customers to purchase annuities with any remaining pension funds atage 75. The Flexible Lifetime Annuity (‘‘FLA’’) offers similar investment choice and income flexibility toFIDP but no lump sum death benefits. Prudential sold £31 million of the FRIA products in 2007.

Lifetime mortgage

Investing in property has been an increasingly important component for many people saving fortheir retirement. However this has left many retirees income poor but asset rich. In October 2005,Prudential launched Prudential Property Value Release Plan, a lifetime mortgage product which givescustomers greater flexibility and control over the timing of when they draw down funds, therebyreducing total interest charges over the lifetime of the loan. It has been well received by advisors andcustomers. Gross advances in 2007 were £156 million, representing a 14 per cent share of the lifetimemortgage market (Source: SHIP). In 2006 a face to face sales team was established to offer direct adviceof the life time mortgage product, with the aim of meeting perceived customer demand for face to facesales in this market. In the third quarter of 2007 a number of product enhancements were introduced,including an inheritance guarantee and a new lump sum product. Prudential expects the overall marketsize to grow and aims to further grow its market share.

Reinsurance

In view of the size and spread of Prudential Assurance’s long-term insurance fund, there is littleneed for reinsurance to protect this business. Some limited reinsurance is maintained and treatiesrelating to critical illness, permanent health insurance, term insurance and certain unit linked productsare in place.

Reserves

In the United Kingdom, a life insurance company’s reserve and other requirements are determinedby its Board, with advice from its Actuarial Function Holder, subject to minimum reserve requirements.

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These minimum reserve requirements are established by the rules and guidance of the Financial ServicesAuthority (‘‘FSA’’).

The reserves are published in annual returns to the FSA. In practice, similar provisions are includedin the life insurance company’s statutory accounts with limited adjustments. The Actuarial FunctionHolder must pay due regard to the fair treatment of policyholders in making recommendations to thecompany’s board. The Actuarial Function Holder is required to report directly to the FSA any seriousconcerns regarding the company’s ability to treat its customers fairly.

Prudential’s regulatory reserving for with-profits products as required by UK regulation, takes intoaccount annual bonuses/annual interest credited to policyholders because these are ‘‘attached’’ to thepolicies and are guaranteed. Realistic reserves are also calculated for with-profits products under UKregulation. These include an allowance for final bonuses based on the asset share or a prospectivevaluation of the policies and the cost of guarantees, smoothing and enhancements.

Prudential reserves for unit-linked products on the basis of the value of the unit fund and additionalreserves are held for expenses and mortality where this is required by the contract design.

As well as the reserves, the company’s assets must also cover other capital requirements set out inthe FSA Prudential Sourcebook. These comprise a with-profits insurance capital component, which is ameasure of the difference in the surplus assets on regulatory and realistic bases; a resilience capitalrequirement for entities other than PAC, which makes prudent allowance for potential future adversemovements in investment values; and the long-term insurance capital requirement, which must be heldby all European Union insurance companies. See ‘‘Financial Strength of Prudential Assurance’s Long-termFund’’ for further information on solvency and ‘‘Realistic Financial Strength Reporting’’ for furtherinformation on realistic reporting.

Financial Strength of Prudential Assurance’s Long-term Fund

The PAC’s long-term fund remains very strong. On a realistic valuation basis, with liabilitiesrecorded on a market consistent basis, the free assets are valued at approximately £8.7 billion atDecember 31, 2007, before a deduction for the risk capital margin.

PAC at December 31, 2007 was rated Aa1 (negative outlook) by Moody’s, AA+ (stable outlook) byStandard & Poor’s, and AA+ (stable outlook) by Fitch.

The table below shows the change in the investment mix of Prudential’s main with-profits fund:

2007 2006% %

UK equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 36International equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 17Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 15Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 25Cash and other asset classes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100

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The with-profits sub-fund delivered a pre-tax investment return of 7.2 per cent in 2007, and overthe last five years the fund has achieved a total return of 91 per cent against 94.6 per cent for theFTSE 100 total return and 104.6 per cent for the FTSE All-Share (Total Return) index (figures are toDecember 31, 2007, before tax and charges). Much of this excellent investment performance wasachieved through the active asset allocation of the fund. As part of its asset allocation process,Prudential UK constantly evaluates prospects for different markets and asset classes. During the yearPAC’s long Term Fund reduced its exposure to property and increased the quality of its corporate bondportfolio. The fund includes the assets of the Equitable Life with-profit annuity business, transferredduring the year, which were almost entirely fixed interest corporate bonds.

Realistic Financial Strength Reporting

In accordance with the FSA Prudential Sourcebook, PAC has to demonstrate solvency on a ‘‘realistic’valuation basis as well as the regulatory basis. In the aggregate, the basis has the effect of placing avalue on the liabilities of UK with-profits contracts that reflects the amounts expected to be paid basedon the current value of investments held by the with-profits funds and current circumstances.

This basis makes companies’ financial health more transparent to policyholders, intermediaries andregulators alike, and enables more informed choices to be made by policyholders. The PAC long-termwith-profits sub-fund is very strong with the inherited estate (free assets) measured on a realistic basis,valued at approximately £8.7 billion at the year end before deducting for the risk capital margin.

Shareholders’ Interests in Prudential’s Long-term Insurance Business

In common with other UK long-term insurance companies, Prudential’s products are structured aseither with-profits products or non-participating (including unit-linked) products. For statutory andmanagement purposes, Prudential Assurance’s long-term fund consists of a number of sub-funds inwhich shareholders and policyholders have varying interests.

With-profits Products

With-profits products provide an equity-type return to policyholders through bonuses that are‘‘smoothed’’. There are two types of bonuses: ‘‘annual’’ and ‘‘final’’. Annual bonuses, often referred toas reversionary bonuses, are declared once a year and, once credited, are guaranteed in accordancewith the terms of the particular product. Unlike annual bonuses, final bonuses are only guaranteed untilthe next bonus declaration. Final bonuses are only credited on a product’s maturity or surrender or onthe death of the policyholder. Final bonuses can represent a substantial portion of the ultimate return topolicyholders.

With-profits policies are supported by a with-profits fund. Prudential’s primary with-profits fund ispart of Prudential Assurance’s long-term fund. With-profits products provide benefits that are generallyeither the value of the premiums paid, less charges and fees and with the addition of declared bonuses,or the guaranteed death benefit with the addition of declared bonuses. Smoothing of investment returnsis an important feature of with-profits products. It is designed to reduce the impact of fluctuations ininvestment return from year to year and is accomplished predominantly through the level of finalbonuses declared.

The return to Prudential’s shareholders in respect of with-profits business Prudential writes is anamount equal to up to one-ninth of the value of the bonuses Prudential credits or declares topolicyholders in that year. Prudential has a large block of in-force with-profits business with varyingmaturity dates that generates a relatively stable stream of shareholder profits from year to year.

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Prudential Assurance’s board of directors, with the advice of its Actuarial Function Holder and itsWith-Profits Actuary determines the amount of annual and final bonuses to be declared each year oneach group of contracts.

When determining policy payouts, including final bonuses, Prudential follows an actuarial practice ofconsidering ‘‘asset shares’’ for specimen policies. Asset shares broadly reflect the value of premiumspaid in respect of a policy accumulated at the investment return on the assets Prudential notionallyattributes to the policy. In calculating asset shares, Prudential takes into account the following items:

• the cost of mortality risk and other guarantees (where applicable),

• the effect of taxation,

• management expenses, charges and commissions,

• the proportion of the amount determined to be distributable to shareholders, and

• the surplus arising from surrenders, non-participating business included in the with-profits fundand other miscellaneous sources.

However, Prudential does not take into account the surplus assets of the long-term fund, or theirinvestment return, in calculating asset shares. Asset shares are used in the determination of finalbonuses together with treating customers fairly, the need to smooth claim values and payments fromyear to year and competitive considerations.

Prudential is required by UK law and regulation to consider the fair treatment of its customers insetting bonus levels. The concept of treating customers fairly is established by statute but is not defined.In practice, it provides one of the guiding principles for decision-making in respect of with-profitsproducts.

The overall return to policyholders is an important competitive measure for attracting new business.The ability to declare competitive bonuses depends, in part, on the financial strength of PrudentialAssurance’s long-term fund, enabling it to maintain high levels of investment in equities and real estate,if it wishes to do so. Equities and real estate have historically over the long-term provided a return inexcess of fixed interest securities.

In 2007, Prudential declared a total surplus of £2,901 million from PAC’s primary with-profitssub-fund, of which £2,612 million was added to with-profits policies and £289 million was distributed toshareholders. This includes annual bonus rates of 3.25 per cent per annum for the Prudence Bond and3.25 per cent per annum for personal pensions. In 2006, Prudential declared a total surplus of£2,693 million from Prudential Assurance’s primary with-profits sub-fund, of which £2,424 million wasadded to with-profits policies and £269 million was distributed to shareholders. This includes annualbonus rates of 3.25 per cent for the Prudence Bond and 3.25 per cent for personal pensions.

The closed Scottish Amicable Insurance Fund (‘‘SAIF’’) declared total bonuses in 2007 of£676 million compared to £599 million in 2006. Shareholders have no interest in profits from the SAIFfund, although they are entitled to the investment management fees paid by this business. For greaterdetail on the SAIF fund, see ‘‘—The SAIF Sub-fund and Accounts’’ below.

Surplus Assets in PAC’s Long-term With-profits Fund

The assets of the main with-profits fund within the long-term fund of PAC comprise the amountsthat PAC expects to pay out to meet its obligations to existing policyholders and an additional amountused as working capital. The amount payable over time to policyholders from the with-profits fund isequal to the policyholders’ accumulated asset shares plus any additional payments that may be requiredby way of smoothing or to meet guarantees. The balance of the assets of the with-profits fund is calledthe ‘inherited estate’ and has accumulated over many years from various sources.

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The inherited estate represents the major part of the working capital of PAC’s long-term insurancefund. This enables PAC to support with-profits business by providing the benefits associated withsmoothing and guarantees, by providing investment flexibility for the fund’s assets, by meeting theregulatory capital requirements that demonstrate solvency and by absorbing the costs of significantevents or fundamental changes in its long-term business without affecting the bonus and investmentpolicies. The size of the inherited estate fluctuates from year to year depending on the investmentreturn and the extent to which it has been required to meet smoothing costs, guarantees and otherevents.

PAC believes that it would be beneficial if there were greater clarity as to the status of the inheritedestate. As a result, PAC has announced that it has begun a process to determine whether it can achievethat clarity through a reattribution of the inherited estate. As part of this process an independentPolicyholder Advocate has been nominated to represent policyholders’ interests should a decision bemade to proceed. This nomination does not mean that a reattribution will occur.

Given the size of the Group’s with-profits business any proposal is likely to be time consuming andcomplex to implement and is likely to involve a payment to policyholders from shareholders’ funds. If areattribution is completed the inherited estate will continue to provide working capital for the long-terminsurance fund.

Depletion of Surplus Assets and Shareholders’ Contingencies

As a proprietary insurance company, Prudential Assurance is liable to meet its obligations topolicyholders even if the assets of the long-term funds are insufficient to do so. The assets, in excess ofamounts expected to be paid for future terminal bonuses and related shareholder transfers (the excessassets) in the long-term funds, represented by the unallocated surplus of with-profits funds could bematerially depleted over time by, for example, a significant or sustained equity market downturn, costsof significant fundamental strategic change or a material increase in mis-selling provisions. In the unlikelycircumstance that the depletion of the excess assets within the long-term fund was such that theGroup’s ability to treat its customers fairly was adversely affected, it might become necessary to restrictthe annual distribution to shareholders or to contribute shareholders’ funds to the long-term funds toprovide financial support.

In 1998, Prudential stated that deducting personal pensions mis-selling costs from the inheritedestate of the With-Profits Sub-Fund would not impact the Company’s bonus or investment policy. TheCompany gave an assurance that if this unlikely event were to occur, it would make available support tothe fund from shareholder resources for as long as the situation continued, so as to ensure thatpolicyholders were not disadvantaged.

The assurance was designed to protect both existing policyholders at the date it was announced,and policyholders who subsequently purchased policies while the pension mis-selling review wascontinuing. The mis-selling review was completed on June 30, 2002 and consequently the assurance hasnot applied to new business issued since January 1, 2004. New business in this context consists of newpolicies, new members to existing pension schemes plus regular and single premium top-ups, transfersand switches to existing arrangements. The assurance will continue to apply to any policy in force as atDecember 31, 2003, both for premiums paid before January 1, 2004 and for subsequent regularpremiums (including future fixed, retail price index or salary related increases and Department for Workand Pensions rebates).

The maximum amount of capital support available under the terms of the assurance for policiesin-force at December 31, 2003 will reduce over time as Prudential pays claims on the policies coveredby it.

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The bonus and investment policy for each type of with-profits policy is the same irrespective ofwhether or not the assurance applies. Hence removal of the assurance for new business has had noimpact on policyholder returns and this is expected to continue for the foreseeable future.

The SAIF Sub-fund and Accounts

The SAIF sub-fund is a ring-fenced sub-fund of PAC’s long-term fund and was formed following theacquisition of the mutual Scottish Amicable Life Assurance Society in 1997. No new business may bewritten in SAIF, although regular premiums are still being paid on policies in-force at the time of theacquisition and ‘‘top-ups’’ are permitted on these policies.

This fund is solely for the benefit of those Scottish Amicable Life Assurance Society policyholderswhose policies were transferred to SAIF. Shareholders have no interest in the profits of this fund,although they are entitled to the investment management fees paid on this business. The brand nameand rights to profit on new business were transferred to a new Prudential subsidiary, Scottish AmicableLife plc, which operated for the benefit of shareholders.

At the time of the acquisition, PAC’s long-term fund made payments of £276 million to the SAIFsub-fund for the unit-linked life business and non-participating life business and the future profits fromunitized with-profits life business. PAC also agreed to set up a memorandum account of £1.3 billion thatis considered in determining SAIF’s investment policy. The SAIF sub-fund pays an annual charge to theother part of PAC’s long-term fund in respect of this memorandum account.

PAC’s long-term fund made a further payment of £185 million to qualifying Scottish Amicable LifeAssurance Society policyholders for the use of the Scottish Amicable brand and future expensesynergies. This payment will be recovered by the long-term fund by means of a combination of a serviceagreement and a license fee agreement with Craigforth Services Limited (now renamed Prudential UKServices Limited), a shareholder-owned service company set up at the time of the acquisition.

In addition to the payments described above, shareholders paid £415 million to qualifying ScottishAmicable Life Assurance Society policyholders, representing goodwill, and £70 million for certainScottish Amicable Life Assurance Society strategic investments.

The adoption on January 1, 2005 of realistic reporting of liabilities in SAIF has had the effect ofincluding the surplus assets over declared bonuses in liabilities rather than as unallocated surplus.

With the exception of certain guaranteed annuity products, referred to below, the majority of SAIFwith-profits policies do not guarantee minimum rates of return to policyholders. Should the assets ofSAIF be inadequate to meet the guaranteed benefit obligations to the policyholders of SAIF, the PAClong-term fund would be liable to cover any such deficiency. Due to the quality and diversity of theassets in SAIF and the ability of SAIF to revise guaranteed benefits in the event of an asset shortfall, thedirectors believe that the probability of either the PAC’s long-term fund or Prudential’s shareholders’funds having to contribute to SAIF is remote.

Non-participating Business

The majority of Prudential-branded non-participating business is written in the non-profit sub-fundof PAC’s long-term fund or in subsidiaries owned by Prudential. Since mid-2004, Prudential has writtenall of its new non-profit annuity business through Prudential Retirement Income limited (‘‘PRIL’’), fromwhich the profits are attributed solely to shareholders. Prior to that time, certain non-profit annuitybusiness was written through Prudential Annuities Limited (‘‘PAL’’), which is wholly owned by PAC’swith-profits fund. The profits on this business are attributable to the fund and not to shareholders,although indirectly shareholders get one ninth of additional amounts paid to policyholders through thedeclaration of bonuses.

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The unit-linked business written by PAC and Prudential International Assurance is written withcapital provided by shareholders.

Guaranteed Annuities

PAC used to sell guaranteed annuity products in the United Kingdom and held a provision of£45 million at December 31, 2007, within the main with-profits fund to honor guarantees on theseproducts. The Company’s main exposure to guaranteed annuities in the United Kingdom is through theSAIF and a provision of £563 million was held in SAIF at December 31, 2007, to honor the guarantees.As SAIF is a separate sub-fund of the Company’s long-term business fund, this provision has no impacton shareholders.

M&G

M&G is Prudential’s fund management business in the United Kingdom and continental Europe andcomprises retail, institutional and internal fund management activities. Its key metrics of performance areprofits, net sales and investment performance.

Fund Management

M&G is an investment-led business with a demonstrable focus on performance delivery and aims tooffer attractive products in a variety of macro-economic environments. M&G aims to deliver superiorinvestment performance and maximize risk-adjusted returns for its retail, wholesale and internal clients.External funds under management account for nearly a third of M&G’s total funds under managementand it is this higher-margin external business that drives profitability and cash generation for the Group.

M&G’s retail strategy is based on obtaining maximum value from a single manufacturing functionthrough a multi-channel, multi-geography distribution approach. Over the last five years, M&G’s retailbusiness has expanded beyond the UK into the major European markets, the Middle East, SouthAmerica and Asia. By operating through multiple channels, M&G’s retail business is well placed to profitfrom current trends away from direct selling towards intermediation, and the growth of on-line fundplatforms and third-party product wrappers.

M&G’s wholesale strategy centres on leveraging the skills developed primarily for internal funds tocreate higher margin products for external clients. In recent years, this strategy has consolidated M&G’sposition at the forefront of the leveraged finance, structured credit and infrastructure investmentmarkets. The same strategy is now being applied to develop the more traditional pooled and segregatedfixed income areas of M&G’s wholesale business.

M&G has significant scale in all major asset classes: M&G believes it is one of the largest activemanagers in the UK stock market, one of the largest bond investors in the UK and one of the UK’slargest property investors. In addition, M&G has profitable businesses in a number of specialist areassuch as leveraged loans, structured credit, infrastructure finance and macro investment.

Key initiatives and performance

Delivering fund performance remains critical and is a key determinant of success for an assetmanagement business. M&G has continued to deliver market-leading investment performance in 2007with impressive results. M&G’s retail funds have performed strongly, with 45 per cent deliveringtop-quartile performance over three years.

Overall, the demand for asset management products in M&G’s distribution markets continued togrow strongly in 2007 driven, in part, by the same retirement-related demographic trends that arecreating opportunities for the Group as a whole.

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With a diversified business across different asset classes and across retail and wholesale markets,both in the UK and internationally, Prudential believes that M&G remains well positioned for a variety ofmacro-economic and market conditions.

The way that clients purchase asset management products continued to evolve during 2007. Theretail asset management sector benefited from the increasing shift by retail investors towards moretransparent investment products, such as unit trusts, and M&G’s range of market leading funds haspositioned it well to benefit from this trend. M&G extended its range of innovative new funds during2007 with the launch of the M&G Cautious Multi Asset Fund and M&G Global Convertibles Fund.

European cross-border distribution of retail funds has accelerated and the trend in favor of ‘OpenArchitecture’ in both the UK and Europe continues to open up significant bank and life companydistribution opportunities. Parallel to this, distribution of mutual funds has become increasinglyintermediated and has been accompanied by the rise of professional buyers who demand higher levelsof service and investment information, areas in which M&G has considerable expertise. M&G hascontinued to expand its geographic coverage in Europe with the first full year of operations in Spain andthe launch of M&G’s funds in France in October 2007, which has given M&G access to Europe’s largestmutual fund market.

Wholesale markets are demanding increasingly sophisticated and tailored products and there is acontinued shift from balanced to specialist mandates. Prudential believes these trends, plus theincreased role of fixed income within portfolios, continue to play to the strength and scale of M&G’swholesale business. In 2007, M&G launched three new funds aimed at the institutional and pensionsmarkets—the M&G Alpha Opportunities Fund, M&G Secured Property Income Fund and the M&GSecured Debt Fund. All of these funds offer innovative alternatives to traditional fixed income assets andleverage off M&G’s expertise and scale in both property and private finance.

M&G’s infrastructure investment business has grown from inception in 2005 to manage £471 million(2007 year end fair value) in its principal fund, Infracapital. The business contributed £7 million to M&Gprofits in 2007.

M&G’s global macro investment business was established in 2005 and has grown to £1.5 billion inexternal funds under management as at the end of 2007. It contributed £11 million in profits to M&G in2007, including performance related fees.

In order to support its retail and wholesale strategy, M&G places a high priority on the recruitment,development and retention of top-quality staff. In a highly competitive market for the best talent, thisentails providing an inclusive and supportive environment as well as offering appropriate levels ofcompensation. At the same time, M&G has a policy of prudent cost control, aimed at ensuring thattop-line growth is translated into enhanced operational gearing. During 2007 turnover of staff remainedin line with industry averages at 10 per cent and the company spent £2 million on training anddevelopment programs.

M&G’s retail business performed well in 2007, with gross fund inflows up 29 per cent to£8.7 billion compared to the previous year. Net fund inflows of £2.7 billion were down 12 per centrelative to 2006, but represent a solid result in light of the more challenging sales environment that wasseen in the second half of 2007. Fourth quarter retail net inflows remained healthy at £0.3 billionagainst this backdrop. While increased volatility and uncertainty in markets have had an effect on retailinvestor confidence, M&G believes that it remains well positioned in its retail markets with strong fundperformance, a strong brand and a well-developed UK and international distribution network.

Gross fund inflows into M&G’s wholesale businesses, were £6.1 billion in 2007, a decrease of11 per cent on last year. Net fund inflows of £2.2 billion were down 25 per cent compared to 2006, inthe main due to reorganization of mandates in the third quarter by some large segregated fixed incomeclients. Higher margin product lines, such as infrastructure finance, leveraged loans, collateralized debt

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obligations (CDOs) and M&G Absolute Return Business, grew strongly in 2007 with gross fund inflowsup 30 per cent and net inflows up 38 per cent during the year. These higher margin wholesale businesslines boosted fourth quarter net inflows to over £1 billion, producing a more profitable sales mix forM&G’s third party business.

The following table shows funds managed by M&G at the dates indicated.

At December 31,

2007 2006

(In £ Billions)

Retail fund management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 19Institutional fund management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 26Internal fund management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 119

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 164

Prudential Capital

Prudential Capital (re-branded from Prudential Finance in 2007) manages Prudential’s balance sheetfor profit through leveraging Prudential’s market position. The business has three strategic objectives: tooperate a first class wholesale and capital markets interface; to realize profitable proprietaryopportunities within a tightly controlled risk framework; and to provide professional treasury services toPrudential. Prudential Capital generates revenue by structuring transactions, providing bridging finance,and operating a securities lending and cash management business for Prudential and its clients.

The business has continued to grow in terms of investment, infrastructure and personnel in acontrolled way while maintaining the dynamism and flexibility that it requires to identify and realizeopportunities for profit. Prudential Capital is committed to working closer with other Group businessunits to deliver opportunities and to improve value creation for the Group. Prudential Capital is alsotaking a more holistic view on hedging strategy, liquidity and capital management for the Group.

Egg

On May 1, 2007, Prudential completed the sale of Egg Banking plc to Citi for a consideration, netof transaction expenses, of £527m.

Group Risk Framework

Philosophy, principles and objectives

Philosophy

As a provider of financial services, including insurance, the Group’s business is the managedacceptance of risk. Prudential believes that effective risk management capabilities are a key competitiveadvantage. A strategic risk, capital and value management framework and risk management culture hasbeen developed to enhance the Group’s embedded and franchise value.

Principles

Risk is defined as the uncertainty that Prudential faces in successfully implementing its strategiesand objectives. This includes all internal or external events, acts or omissions that have the potential tothreaten the success and survival of Prudential.

The control procedures and systems established within the Group are designed to manage, ratherthan eliminate, the risk of failure to meet business objectives. They can only provide reasonable and not

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absolute assurance against material misstatement or loss, and focus on aligning the levels of risk-takingwith the achievement of business objectives.

The Group’s policy is to proactively identify, assess, control, and monitor risk. This forms anessential element of delivering the Group’s performance ambition. In so doing, Prudential aims to onlyretain material risks where this is consistent with Prudential’s risk appetite framework, i.e.:

• The retention of the risk contributes to value creation.

• The Group is able to withstand the impact of an adverse outcome.

• The Group has the necessary capabilities, expertise, processes and controls to manage the risk.

Objectives

The Group aims to achieve the following five objectives through its risk and capital managementpolicies:

a Framework: Design, implement and maintain a consistent risk management framework and policiesspanning: economic, regulatory and rating agency capital management; risk appetite; andrisk-adjusted profitability (RAP).

b Monitoring: Establish a ‘no surprises’ risk management culture by identifying the risk landscape,assessing and monitoring risk exposures and understanding change drivers.

c Control: Implement risk mitigation strategies and remedial actions where exposures are deemed‘inappropriate’ and manage the response to extreme events.

d Communication: Communicate the Group risk, capital and profitability position to internal andexternal stakeholders and rating agencies.

e Culture: Foster a risk management culture, providing quality assurance and facilitating the sharing ofbest practice risk measurement and management across the Group and industry.

Categorisation model

A common set of risk principles and terminology is used across the Group, which allows meaningfulcomparisons to be made between different business units. Risks are broadly categorized as shownbelow.

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Risk categorisation

Category Risk type Definition

Financial risks Market risk The risk that arises from adverse changes in the valueof, or income from, assets and changes in interest ratesor exchange rates.

Credit risk The risk of loss if another party fails to perform itsobligations, or fails to perform them in a timely fashion.

Insurance risk The inherent uncertainty as to the occurrence, amountand timing of insurance liabilities. This includes adversemortality, morbidity and persistency experience.

Liquidity risk The risk that a business, though solvent on a balancesheet basis, either does not have the financial resourcesto meet its obligations as they fall due or can securethem only at excessive cost.

Non-financial risks Operational risk The risk of direct or indirect loss resulting frominadequate or failed internal processes, people orsystems, or from external events. This includes legal andregulatory compliance risk.

Business environment Exposure to forces in the external environment thatrisk could significantly change the fundamentals that drive

the business’s overall objectives and strategy.

Strategic risk Ineffective, inefficient or inadequate senior managementprocesses for the development and implementation ofbusiness strategy in relation to the business environmentand the Group’s capabilities.

Governance

The Group’s internal control processes are detailed in the Group Governance Manual. This issupported by the Group Risk Framework, which provides an overview of the Group-wide philosophy andapproach to risk management. For joint ventures where the Group does not control management, thebusiness unit party to the arrangement must satisfy itself that suitable governance and risk managementarrangements are in place to protect the Group’s interests and comply with the Group’s requirements inrespect of any operations it performs in support of the joint venture’s activities.

Prudential’s risk governance framework requires that all of the Group’s businesses and functionsestablish processes for identifying, evaluating and managing the key risks faced by the Group. The riskgovernance framework is based on the concept of ‘three lines of defense’: risk management, riskoversight and independent assurance.

Risk management

Primary responsibility for strategy, performance management and risk control lies with thePrudential plc Board of directors (the Board), the Group Chief Executive and the chief executives ofeach business unit. Additionally, the Board has delegated responsibility to the Approvals Committee toapprove actions which could significantly change the risk profile of any business, capital commitmentsand divestments within defined materiality thresholds, and certain legal matters involving trademarks,contracts, material guarantees and specific interactions with third parties.

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Where appropriate, more detailed policies and procedures have been developed at Group and/orbusiness unit levels. These include Group-wide mandatory policies on certain operational risks, including:health, safety, fraud, money laundering, bribery, business continuity, information security and operationalsecurity. Additional guidelines are provided for some aspects of actuarial and finance activity.

Board: The Board has overall responsibility for the system of internal control and riskmanagement. It approves the overall framework for managing the risks faced by the Group and providesstrategic direction on the amount and type of risk that the Group is prepared to accept.

Group executive management: The Group Chief Executive has overall responsibility for the risksfacing the Group. The Group Chief Executive recommends to the Board the amount and type of riskthat the Group is prepared to accept, and recommends risk management strategies as well as an overallframework for managing the risks faced by the Group with support from the Group ExecutiveCommittee, Chief Financial Officer and Group level risk committees. The Group Chief Executive providesregular updates to the Board on the risk position and risk policy.

Business unit management: Business unit chief executives are accountable for the implementationand operation of appropriate business unit risk frameworks and for ensuring compliance with the policyand minimum standards set by the Group. Business units must establish suitable governance structuresthat are based on the concept of ‘three lines of defense’, tailored as appropriate to the scale andcomplexity of the business unit. As the first line of defense, business unit management is responsible foridentifying and managing business unit risks and providing regular risk reporting to the Group.

Risk oversight

Risk management oversight is provided by Group-level risk committees, the Chief Financial Officerand the Group Risk function, working with counterparts in the business units and other Group HeadOffice (‘‘GHO’’) oversight functions.

Group-level risk committees

Group Asset Liability Committee (‘‘Group ALCo’’): The Group ALCo is responsible for oversight offinancial risks (market, credit, liquidity and insurance risks) across the Group. It is chaired by the ChiefFinancial Officer and its membership includes senior business unit and Group executives (chief actuaries,principal asset liability management officers and chief investment officers) who are involved in themanagement of the aforementioned risks. Group ALCo meetings are held on a monthly basis.

Balance Sheet and Capital Management Committee (‘‘BSCMC’’): The BSCMC is responsible formanaging the balance sheets of Prudential plc and oversight of the Prudential Capital business unit. It ischaired by the Chief Financial Officer and its membership includes senior representatives from GHO,M&G and Prudential Capital. BSCMC meetings are held on a monthly basis.

Group Operational Risk Committee (‘‘GORC’’): The GORC is responsible for the oversight ofnon-financial risks (operational, business environment and strategic risks) across the Group.Responsibilities include monitoring operational risk and related policies and processes as they areapplied throughout the Group. It is chaired by the Chief Financial Officer and its membership includessenior representatives of the Group and business unit risk functions. GORC meetings are held on aquarterly basis.

Group Risk

Group Risk’s mandate is to establish and embed a strategic risk, capital and value managementframework and risk management culture, consistent with Prudential’s risk appetite, that protects andenhances the Group’s embedded and franchise value.

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Group Risk is responsible for the continued enhancement and evolution of the Group RiskFramework; provides functional leadership to the business units for the oversight of risk managementacross the Group; and acts as secretariat to the Group ALCo and GORC.

Group Risk also has certain finance and actuarial responsibilities related to Group regulatory andrating agency capital requirements, development of actuarial and financial reporting requirements andthe RAP value management framework.

Independent assurance

Group Audit Committee: The Group Audit Committee provides independent assurance to theBoard on the effectiveness of the Group’s system of internal controls and risk management. The GroupAudit Committee reviews the Group’s risk management framework, and regular risk reports. The GroupAudit Committee is supported by Group-wide Internal Audit.

Group-wide Internal Audit (‘‘GwIA’’): The GwIA function independently assures the effectiveoperation of the Group’s risk management framework. This involves the validation of methodologyapplication, policy compliance and control adequacy. The GwIA Director reports all audit-related mattersto the Group Audit Committee (and business unit audit committees where appropriate) and reports formanagement purposes (but not audit-related matters) to the Group Chief Executive.

Risk appetite

The Group risk appetite framework sets out the Group’s overall tolerance to risk exposures,approach to risk and return optimization and management of risk. The Board and Group ExecutiveCommittee have set up Group-level risk appetite statements concerning the key risk exposures faced bythe Group. The Group risk appetite statements set out the Group’s risk tolerance, or risk appetite, to‘shocks’ to the key financial risk exposures (market, credit and insurance risk).

Limits

Aggregate risk limits are defined in terms of earnings volatility and capital requirements as follows:

a Earnings volatility: The objectives of the limits are to ensure that (a) the volatility of earnings isconsistent with stakeholder expectations; (b) the Group has adequate earnings (and cash flows) toservice debt and expected dividends; and (c) that earnings (and cash flows) are managed properlyacross geographies and are consistent with the Group’s funding strategies. The two measures usedare EEV basis operating profit and IFRS basis operating profit.

b Capital requirements: The objectives of the limits are to ensure that (a) the Group is economicallysolvent; (b) the Group achieves its desired target rating to meet its business objectives;(c) supervisory intervention is avoided; (d) any potential capital strains are identified; and(e) accessible capital is available to meet business objectives. The two measures used are EUInsurance Groups Directive (‘‘IGD’’) capital requirements and economic capital requirements.

Business units must establish suitable market, credit, underwriting and liquidity limits that maintainfinancial risk exposures within the defined risk appetite.

In addition to business unit operational limits on credit risk, counterparty risk limits are also set atthe Group level. Limits on total Group-wide exposures to a single counterparty are specified for differentcredit rating ‘buckets’. Actual exposures are monitored against these limits on a quarterly basis.

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Usage by business units

Risk appetite is part of the annual business planning cycle. The risk profile of the Group ismonitored against the agreed limits throughout the year by Group Risk. Using submissions frombusiness units, Group Risk calculates the Group’s position (allowing for diversification effects betweenbusiness units) relative to the limits implied by the risk appetite statements.

In order to determine its risk position, each business unit calculates the impacts (on earnings andcapital measures) of a shock to market, credit, insurance and operational risk exposures.

A two-tier approach is used to apply the limits at business unit level. Firstly, indicative business unitrisk limits are calculated; these ensure that, if each business unit keeps within its limits, the Group riskposition would be within the Group limits. Secondly, the impact on the risk position is considered aspart of Group Risk’s scrutiny of large transactions or departures from plan proposed by individualbusiness units.

Any potential breaches of the risk limits implied by a business unit plan will necessitate a dialogueprocess between GHO and the business units. Group limits may not be breached if, for example, limitsin other business units are not fully utilized, or the diversification effect at Group level of a particularrisk with other business units means that the Group limit is not breached. Ultimately, authorization tobreach Group limits would require Group Executive Committee approval.

Risk management process

Risk mitigation

The Group expects active management of its actual risk profile against its tolerance of risk. Primaryresponsibility for identifying and implementing controls and mitigation strategies rests with the businessunits. Group Risk provides oversight and advice.

Risk registers are maintained that include details of the controls and mitigating actions beingemployed for identified risks. The effectiveness of controls and progress with actions are routinelyassessed. Any mitigation strategies involving large transactions (e.g. a material derivative transaction)would be subject to scrutiny at Group level before implementation.

Prudential employs a range of risk mitigation strategies aimed at reducing the impact of a variety ofrisks. Key mitigation strategies include: adjustment of asset portfolios to reduce investment risks (suchas duration mismatches or overweight counterparty exposures); use of derivatives to hedge market risks;reinsurance programmes to limit insurance risk; and corporate insurance programmes to limit impact ofoperational risks. Revisions to business plans (such as reassessment of bonus rates on participatingbusiness and scaling back of target new business volumes) may also be used as a mitigating strategy.

Contingency plans are in place for a range of operational risk scenarios, including incidentmanagement and business continuity plans. As a contingency plan for liquidity risk, the Group hasarranged access to committed revolving credit facilities and committed securities lending facilities.

Asset liability management

Prudential manages its assets and liabilities locally, in accordance with local regulatory requirementsand reflecting the different types of liabilities of each business unit. Stochastic asset-liability modeling iscarried out locally by the business units to perform dynamic solvency testing and assess economiccapital requirements. Reserve adequacy testing under a range of scenarios is also carried out, includingscenarios prescribed by local regulatory bodies.

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The investment strategy for assets held to back liabilities is set locally by business units, taking intoaccount the nature, term and currency of the liabilities, and any local regulatory requirements. The mainprinciples are as follows:

• For liabilities that are sensitive to interest rate movements (in particular, UK non-profit annuitiesand Jackson fixed annuities), cash flow analysis is used to construct a portfolio of fixed incomesecurities whose value changes in line with the value of liabilities when interest rates change;

• For participating business (in particular, the UK with-profits fund), stochastic asset-liabilitymodeling is used to derive a strategic asset allocation and policyholder bonus strategy that (basedon the model assumptions) will optimize policyholder and shareholder returns, while maintainingfinancial strength. The bonus strategy on participating business is an integral part of the asset-liability management approach for participating business; and

• For unit-linked business, the assets held to cover policyholder unit accounts are invested as perthe stated investment strategy or benchmark index given in the product marketing literature.Assets in respect of non-unit reserves (e.g. sterling reserves) are invested in fixed incomesecurities (using a cash flow matching analysis).

Derivative hedging strategies are also used on a controlled basis across the Group to manageexposure to market risks. Surplus assets held centrally are predominantly invested in short-term fixedincome securities. The Group’s central treasury function actively manages the surplus assets to maximizereturns, subject to maintaining an acceptable degree of liquidity.

Risk reporting

Group Risk and other GHO oversight functions have individually defined and publicized frameworks,escalation criteria and processes for the timely reporting of risks and incidents by business units. Asappropriate, these risks and incidents are escalated to the various Group-level oversight and riskcommittees and the Board.

Internal business unit routine reporting requirements vary according to the nature of the business.Each business unit is responsible for ensuring that its risk reporting framework meets both the needs ofthe business unit (for example reporting to the business unit risk and audit committees) and theminimum standards set by the Group (for example, to meet Group-level reporting requirements).

Business units review their risks as part of the annual preparation of their business plans, andreview opportunities and risks to business objectives regularly with Group executive management.Group Risk reviews, and reports to Group executive management on, the impact of large transactions ordivergences from business plan.

The Group Executive Committee and Board are provided with regular updates on the Group’seconomic capital position, overall position against risk limits and RAP. They also receive the annualfinancial condition reports prepared by the Group’s insurance operations.

Economic capital

Economic capital provides a realistic and consistent view of Prudential’s capital requirements acrossthe Group, allowing for diversification benefits. Economic capital provides valuable insights into the riskprofile of the Group and is an integral part of the Group’s risk management framework.

The Group distinguishes between two distinct types of ‘economic capital’ approaches:

• Group economic capital: Prudential’s Group economic capital is calculated using an integratedmodel of Group-wide risk, capturing dependencies and diversification benefits between differentbusiness units and risk categories. The capital requirement is determined based on a multi-year

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projection, thus taking into account the long-term nature of Prudential’s liabilities. The Groupeconomic capital position is calculated using the Group Solvency Model (GSM)—an integratedstochastic asset-liability model of the Group economic solvency position. Projected economicscenarios in the GSM are generated using a stochastic economic scenario generator that capturesthe correlations between different asset classes and geographies.

• One-year Value at Risk Capita (‘‘1yr VaR Capital’’): 1yr VaR Capital is defined as the capitalrequired to withstand a maximum loss over a time period of one year, consistent with aconfidence level of 99.5 per cent. This measure was developed internally as part of Prudential’sRAP approach to risk/return optimization within the Group risk appetite framework. This measurecaptures the risk arising from individual risk types, and generally allows for diversification byusing a correlation matrix approach. The methodology is continually being developed andimproved. In addition to its risk management applications, the 1yr VaR Capital framework is usedfor Individual Capital Assessments in the UK and anticipated to form the basis of Prudential’scapital modeling for future regulatory reporting developments, such as Solvency II.

These measures provide a consistent basis for comparing the risk profiles and capital requirementsof different business units. The Group economic capital position and risk profile is reported to the Boardannually, with more frequent updates on an ad hoc basis. Group Risk is responsible for developing andmaintaining the economic capital models, and for calculating the Group economic capital position.

Methodology

Prudential’s internal Group economic capital requirement is defined as the minimum amount ofcapital that the Group needs to hold in order to remain economically solvent over a 25-year horizon,given a target probability of insolvency appropriate for AA-rated debt. The target confidence level isbased on historic default rates for AA-rated debt, and varies over the time horizon of the projection. Theeconomic capital requirement is calculated for in-force liabilities only, excluding the impact of future newbusiness and dividend distribution.

For the purposes of calculating Group economic capital, Group ‘economic solvency’ is defined asthe position where both: (a) the capital balance of the parent company is positive, and (b) all businessunits are solvent on the applicable local regulatory basis. This definition of solvency allows the Group’scapital position to be assessed on an economic basis while taking into account the actual regulatoryconstraints at the business unit level.

Results

Prudential has previously published in its UK Annual Report details of its economic capital positionas of December 31, 2006. Prudential’s internal review and analysis process for the position as ofDecember 31, 2007 has not yet been completed.

As at December 31, 2006, the Group economic capital requirement was £1.6 billion, compared toavailable capital resources of £4.5 billion. The Group economic capital requirement quoted is afterallowance for diversification benefits between risk types and business units, and inclusive of the localregulatory capital requirements at the business unit level. The economic capital requirement is calculatedfor in-force liabilities only, excluding the impact of future new business and dividend distributions.

The Group position at the end of 2006 shows a surplus position of £2.8 billion, representing animprovement of £0.5 billion from last year. Most of this improvement comes from the sale of Egg, whichhas reduced the Group’s exposure to credit risk. Note that the economic capital surplus quoted aboveexcludes any surplus in respect of the Group’s participating with-profits funds. For Group economiccapital, it is assumed that any free assets in participating funds are ring-fenced to support the relevantfund (and excluded from the Group’s economic surplus). Any capital injections required by participating

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funds (on top of the ring-fenced free assets) are captured in the Group economic capital requirementcalculation. For year end 2006, none of the Group’s participating funds required additional economiccapital on top of the ring-fenced free assets.

The largest risk exposure continues to be credit risk, which reflects the relative size of the exposurein Jackson and Prudential UK. However, credit risk has reduced due to the sale of Egg and Jackson’smaturing fixed annuity business. The market risk exposure mainly reflects equity risk in Jackson andinterest rate risk in Taiwan. An increasingly significant component of the underwriting risk is attributableto longevity risk, which has increased due to the growth in annuity business being written in the UKshareholder fund.

Scenario testing

The impact of a range of deterministic ‘shock’ scenarios is tested using the Group economic capitalmodel. The purpose is to assess the resilience of the Group’s economic solvency position to a range ofkey threat scenarios.

Scenarios tested include economic capital scenarios relating to stable, falling and rising interestrates, as well as scenarios relating to high oil prices, lower consumption and US dollar depreciation. Inaddition, scenarios proposed by the FSA’s Financial Risk Outlook are tested. These scenarios haveincluded a credit and house price crisis, global risks reappraisal, and a pandemic.

The impact of each scenario was tested by analyzing the projected Group cash flow balances over25 years, assuming in the model that the initial capital held by the Group is zero and the initial capitalheld in each business unit is equal to the local regulatory capital requirement. The results of the analysisshowed that the projected net cash flow balance to the Group remains positive in all future years undereach scenario tested.

Business unit local economic capital

Business units must also monitor their own economic capital requirements locally on a ‘stand alone’basis (without allowance for diversification effects with the rest of the Group). The business uniteconomic capital assessments allow management to put the local regulatory capital requirements into aneconomic context. These assessments must be reported annually, and included in the business unitfinancial condition reports.

Market risk

Market risk is the risk that arises from adverse changes in the value of, or income from, assets andchanges in interest rates or exchange rates. Prudential’s businesses are inherently subject to marketfluctuations and general economic conditions.

In the UK, this is because a significant part of Prudential’s shareholders’ profit is related to bonusesfor policyholders declared on its with-profits products, which are broadly based on historic and currentrates of return on equity, real estate and fixed income securities, as well as Prudential’s expectations offuture investment returns.

In the US, fluctuations in interest rates can affect results from Jackson, which has a significantspread-based business and where the majority of investments are in fixed-income securities. The spreadis the difference between the rate of return Jackson is able to earn on the assets backing thepolicyholders’ liabilities and the amounts that are credited to policyholders in the form of benefitincreases, subject to minimum crediting rates. Jackson also writes a significant amount of variableannuities that offer capital or income protection guarantees. Any cost of the guarantees that remainunhedged will affect the Company’s results.

57

For some non-linked investment products, in particular those written in some of the Group’s Asianoperations, it may not be possible to hold assets which will provide cash flows to exactly match thoserelating to policyholder liabilities. This is particularly true in those countries where bond markets are notdeveloped and in certain markets, such as Taiwan, where regulated surrender values are set withreference to the interest rate environment prevailing at time of policy issue. This results in a mismatchdue to the duration and uncertainty of the liability cash flows and the lack of sufficient assets of asuitable duration. This residual asset-liability mismatch risk can be managed but not eliminated. Whereinterest rates for these markets remain lower than those implied by surrender values over a sustainedperiod this could have an adverse impact on the Group’s reported profit.

For each of the major components of market risk, described in more detail below, Prudential hasput in place policies and procedures to set out how each risk should be managed and monitored, andthe approach to setting an appropriate risk appetite.

Foreign exchange risk

Prudential currently operates in the UK, the US, 13 countries in Asia and Europe. Due to thegeographical diversity of Prudential’s businesses, it is subject to the risk of exchange rate fluctuations.Prudential’s international operations in the US and Asia, which represent a significant proportion ofoperating profit and shareholders’ funds, generally write policies and invest in assets denominated inlocal currency. Although this practice limits the effect of exchange rate fluctuations on local operatingresults, it can lead to significant fluctuations in Prudential’s consolidated financial statements upontranslation of results into pounds sterling. The currency exposure relating to the translation of reportedearnings is not separately managed. Consequently, this could impact on the Group’s gearing ratios(defined as debt over debt plus shareholders’ funds). The impact of gains or losses on currencytranslations is recorded as a component within the statement of changes in equity.

Prudential does not generally seek to hedge foreign currency revenues, as these are substantiallyretained locally to support the growth of the Group’s business and meet local regulatory and marketrequirements. However, where foreign surplus is deemed to be supporting UK capital or shareholders’interests this exposure is hedged if it is deemed optimal from an economic perspective. Currencyborrowings and derivatives are used to manage exposures within the limits that have been set.

Interest rate risk

Interest rate risk arises primarily from Prudential’s investments in long-term debt and fixed incomesecurities. Interest rate risk also exists in policies that carry investment guarantees on early surrender orat maturity, where claim values can become higher than the value of backing assets when interest ratesrise or fall.

The Group manages this risk by adopting close asset-liability matching criteria, to minimize theimpact of mismatches between the value of assets and liabilities from interest rate movements. Interestrate risk is also controlled through the use of a variety of derivative instruments, including futures,options and swaps, in order to hedge against unfavorable market movements in interest rates inherent inthe underlying assets and liabilities. The impact of exposure to sustained low interest rates is regularlymonitored.

Equity risk

The Group is subject to equity price risk due to daily changes in the market values of its equitysecurities portfolio. The Group’s shareholders are exposed to both direct equity shareholdings in itsshareholder assets, and indirectly to the impact arising from changes in the value of equities held inpolicyholders’ funds from which management charges or a share of performance are taken, as well asfrom its interest in the free estate of long-term funds.

58

At a business unit level, equity price risk is actively managed through the use of derivativeinstruments, including futures and options, in order to mitigate anticipated unfavorable marketmovements where this lies outside the risk appetite of the fund concerned. Business units activelymodel the performance of equities through the use of stochastic models, in particular to understand theimpact of equity performance on guarantees, options and bonus rates.

In particular, Jackson actively hedges its exposure to the guarantees arising from its variable annuitybusiness. Where possible, Jackson will seek to find offsetting exposures across its asset and liabilityportfolios and to conduct its hedging activities on a macro basis, and relies on option-based strategies toaddress extreme risks. Although the macro approach and the hedging of extreme events are notconsistent with the way certain accounting methods test for effectiveness, Prudential believes that theefficiency of execution and the need to hedge on an economic basis outweighs the need to avoid anyshort-term accounting volatility.

The Group does not have material holdings of unquoted equity securities. In addition, local assetadmissibility regulations require that business units hold diversified portfolios of assets, thereby reducingexposure to individual equities.

Credit risk

Credit risk is the risk of loss if another party fails to meet its obligations, or fails to perform them ina timely manner. Credit risk is Prudential’s most significant financial risk, and it is actively monitored bybusiness units via business unit investment committees and ALCos.

In addition to business unit operational limits on credit risk (requiring business units to implementlocal credit risk policies), Prudential’s management of credit risk includes monitoring exposures at Grouplevel. Large individual counterparty exposures are aggregated and monitored on a quarterly basis againstcentrally-set red zone, amber zone and green zone limits. This active monitoring of counterpartyexposures, on a consolidated Group level, is undertaken by the Group ALCo.

Financial assets are graded according to current credit ratings issued by the rating agencies.Financial assets are classified within the range of AAA to D ratings, with AAA being the highest possiblerating. Typically, around 95 per cent of the Group’s assets are rated within the investment gradecategory (BBB- and higher). The level of financial assets which fall outside the range of the ratings isalso monitored on an ongoing basis, and this tends to be less than one per cent of shareholder assets atany given point in time.

Insurance risk

Insurance risk is the inherent uncertainty as to the occurrence, amount and timing of insuranceliabilities. This includes adverse mortality, morbidity and persistency experience.

Prudential needs to make assumptions about a number of factors in determining the pricing of itsproducts and for reporting the results of its long-term business operations. In common with otherindustry participants, the profitability of the Group’s businesses depends on a mix of factors includingmortality and morbidity trends, voluntary discontinuance rates, investment performance, unit cost ofadministration and new business acquisition expenses.

For example, the assumption that Prudential makes about future expected levels of mortality isparticularly relevant for its UK annuity business where, in exchange for their accumulated pension fund,pension annuity policyholders receive a guaranteed payment, for as long as they live. Prudentialconducts rigorous research into longevity risk using data from its substantial annuitant portfolio. As partof its pension annuity pricing and reserving policy, Prudential UK assumes that current rates of mortalitycontinuously improve over time at levels based on adjusted data from the Continuous Mortality

59

Investigations (CMI) medium cohort table projections as published by the Institute and Faculty ofActuaries.

Prudential’s voluntary discontinuance (persistency) assumptions reflect recent past experience foreach relevant line of business, and any expectations of future persistency. Where appropriate, allowanceis also made for the relationship, which is either assumed or historically observed, between persistencyand investment returns and the resulting additional risk is allowed for.

Liquidity risk

Liquidity risk is the risk that a business, though solvent on a balance sheet basis, either does nothave the financial resources to meet its obligations as they fall due or can secure the resources only atexcessive cost.

Business units have their own liquidity policies, which also depend on the maturity of the business,and the available assets in the markets. For Prudential UK, liquidity risk is managed through holdingassets at the greater of a specified percentage of total funds managed or a specified multiple of theaverage peak daily cash flow over the last 12 months. For Jackson, modeling is performed on howquickly their different liabilities could be called, and how quickly they could also liquidate their assets,ensuring that at 30 days, 90 days and one year the cash available exceeds potential obligations.

For Prudential Group, there is a committed corporate credit facility for liquidity.

Non-financial risk

Prudential’s Group Risk Framework also covers non-financial risks—operational risk, businessenvironment risk and strategic risk. Prudential processes a large number of complex transactions acrossnumerous and diverse products, and is subject to a number of different legal and regulatory regimes.Prudential outsources several operations, including certain UK processing and IT functions, and is thusreliant upon the operational processing performance of its outsourcing partners.

Business units are responsible for the management of the non-financial risks associated with theirbusiness. They conduct a formal self-assessment of material operational risks and assess their impact andlikelihood. Business units also identify controls available to mitigate the impact and/or likelihood of theidentified risk. The quality of the control’s design is also assessed.

Quantitative analysis is carried out for operational risks with material and potential direct losses(i.e. excluding opportunity costs and lost revenue). For each risk, the analysis describes the possiblemanifestations of the risk and the controls against it in each business unit and, on this basis, frequencyand severity parameters are assigned to each risk. The effect of operational risk on the Group as awhole is analyzed by aggregating the individual risks using a Group operational risk capital model,allowing for the correlations and diversification effects between different risk types and business units.

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Investments

General

The overall financial strength of the Prudential group and the results, both current and future, ofthe insurance business are in part dependent upon the quality and performance of the variousinvestment portfolios in the United Kingdom, the United States and Asia.

Prudential’s Total Investments

The following table shows Prudential’s insurance and non-insurance investments at December 31,2007. In addition, at December 31, 2007 Prudential had £62.5 billion of external mutual funds undermanagement. Assets held to cover linked liabilities relate to unit-linked and variable annuity products. Inthis table, investments are valued as set out in note A4 of the Prudential’s consolidated financialstatements.

At December 31, 2007

GroupLess: excluding

assets to assets tocover coverlinked linked

liabilities liabilitiesand and

external externalUK US Asia Total Asset unit unit

Insurance Insurance Insurance Insurance Mgmt(a) Other Total holders(b) holders£m £m £m £m £m £m £m £m £m

Investment properties . . . . . . 13,666 8 14 13,688 0 0 13,688 (1,030) 12,658Investments accounted for

using the equity method . . . 0 0 0 0 0 12 12 0 12Financial investments:

Loans . . . . . . . . . . . . . . 1,245 3,258 1,087 5,590 2,334 0 7,924 (37) 7,887Equity securities . . . . . . . . 60,829 15,507 9,804 86,140 17 0 86,157 (31,705) 54,452Debt securities . . . . . . . . . 57,180 19,002 6,920 83,102 882 0 83,984 (8,870) 75,114Other investments . . . . . . . 3,391 762 42 4,195 155 46 4,396 (121) 4,275Deposits . . . . . . . . . . . . 7,228 258 377 7,863 26 0 7,889 (1,536) 6,353

Total financial investments . . . 129,873 38,787 18,230 186,890 3,414 46 190,350 (42,269) 148,081

Total investments . . . . . . . . 143,539 38,795 18,244 200,578 3,414 58 204,050 (43,299) 160,751

(a) Investments held by asset management operations are further split in note E2 of the notes to Prudential’s consolidatedfinancial statements.

(b) Assets to cover external unit holders relate to assets attributable to unit holders of consolidated unit trusts and similar fundsfor which an equivalent liability is held in the balance sheet.

The disclosure below has been provided on a consistent basis as that included in previousForm 20-F submissions, with analysis focusing on the investments attributable to shareholders andconsequently excluding those held to cover linked liabilities or attributable to unit holders ofconsolidated unit trusts and similar funds.

In addition to the detail provided below further analysis is included in the consolidated financialstatements, with the adoption in 2007 of IFRS 7 ‘‘Financial Instruments: Disclosures’’ together with theprovision of voluntary detail further enhancing the disclosure provided in previous years. The furtheranalysis is included in notes D2(b), D2(i), D3(b), D3(i), D4 (a), D4 (h), E2, G1 and G2 to Prudential’sconsolidated financial statements.

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Prudential’s Investment Yields

The following table shows the income from the investments of Prudential’s operations by assetcategory for the periods indicated. This table does not include investment income from assets held tocover linked liabilities and those attributable to external unit holders of consolidated unit trusts andsimilar funds. Yields have been calculated using the average of opening and closing balances for theappropriate asset.

Year Ended December 31,

2007 2006 2005Yield Amount Yield Amount Yield Amount

£m £m £m

Investment propertiesNet investment income . . . . . . . . . . . . . . . 4.9% 611 5.7% 686 6.4% 768Net realized investment gains (losses) . . . . . . 1.2% 147 6.3% 761 6.2% 753Net unrealized investment gains (losses) . . . . (5.8)% (723) 4.2% 504 5.0% 600Ending assets . . . . . . . . . . . . . . . . . . . . . . 12,658 12,258 11,832

Investments accounted for using the equitymethodNet investment income . . . . . . . . . . . . . . . 0% 0 0% 0 0% 0Net realized investment gains (losses) . . . . . . 0% 0 0% 0 0% 0Net unrealized investment gains (losses) . . . . 0% 0 0% 0 0% 0Ending assets . . . . . . . . . . . . . . . . . . . . . . 12 0 0

LoansNet investment income . . . . . . . . . . . . . . . 6.4% 425 6.9% 386 6.4% 339Net realized investment gains (losses) . . . . . . 0.7% 47 (0.1)% (3) (0.2)% (10)Net unrealized investment gains (losses) . . . . 0% 0 0% 0 0% 0Ending assets . . . . . . . . . . . . . . . . . . . . . . 7,887 5,362 5,810

Equity securitiesNet investment income . . . . . . . . . . . . . . . 4.5% 2,388 6.5% 3,373 6.1% 2,731Net realized investment gains . . . . . . . . . . . 8.7% 4,633 6.8% 3,546 4.8% 2,177Net unrealized investment gains (losses) . . . . (3.0)% (1,589) 4.4% 2,302 14.7% 6,609Ending assets . . . . . . . . . . . . . . . . . . . . . . 54,452 52,475 51,281

Debt securitiesNet investment income . . . . . . . . . . . . . . . 5.9% 4,335 6.8% 4,832 6.1% 4,255Net realized investment gains (losses) . . . . . . 0% (18) 0.2% 170 0.4% 287Net unrealized investment gains (losses) . . . . (1.5)% (1,129) (3.5)% (2,539) 2.6% 1,779Ending assets . . . . . . . . . . . . . . . . . . . . . . 75,114 71,239 71,841

Other investmentsNet investment income . . . . . . . . . . . . . . . 2.5% 119 2.9% 129 3.7% 112Net realized investment gains . . . . . . . . . . . 6.4% 306 0.4% 18 1.6% 49Net unrealized investment gains (losses) . . . . 14.4% 687 7.5% 333 12.9% 395Ending assets . . . . . . . . . . . . . . . . . . . . . . 4,275 5,240 3,625

DepositsNet investment income . . . . . . . . . . . . . . . 5.5% 365 4.5% 305 5.1% 297Net realized investment gains . . . . . . . . . . . 0% 0 0% 0 0% 0Net unrealized investment gains (losses) . . . . 0% 0 0% 0 0% 0Ending assets . . . . . . . . . . . . . . . . . . . . . . 6,353 7,020 6,510

TotalNet investment income . . . . . . . . . . . . . . . 5.2% 8,243 6.4% 9,711 6.1% 8,502Net realized investment gains . . . . . . . . . . . 3.3% 5,115 3.0% 4,492 2.3% 3,256Net unrealized investment gains (losses) . . . . (1.8)% (2,754) 0.4% 600 6.7% 9,388Ending assets . . . . . . . . . . . . . . . . . . . . . . 160,751 153,594 150,899

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Prudential’s Insurance Investment Strategy and Objectives

Prudential’s insurance investments support a range of businesses operating in many geographicareas. Each of the operations formulates a strategy, based on the nature of its underlying liabilities, itslevel of capital and its local regulatory requirements.

Internal funds under management

Prudential manages 87 per cent of its group funds principally through its fund managementbusinesses, M&G in the United Kingdom, together with PPM America in the United States andPrudential Asset Management in Singapore, Hong Kong and Japan. The remaining 13 per cent of thegroup’s funds mainly relate to assets held to back unit-linked, unit trust and variable annuity liabilities.

In each of the operations, local management analyzes the liabilities and determines asset allocation,benchmarks and permitted deviations from these benchmarks appropriate for its operation. Thesebenchmarks and permitted deviations are agreed with internal fund managers, who are responsible forimplementing the specific investment strategy through their local fund management operations.

Investments Relating to UK Insurance Business

Strategy

In the United Kingdom, Prudential tailors its investment strategy for long-term business, other thanunit-linked business, to match the type of product a portfolio supports. The primary distinction isbetween with-profits portfolios and non-participating portfolios, which include the majority of annuityportfolios. Generally, the objective is to maximize returns while maintaining investment quality and assetsecurity and adhering to the appropriate government regulations.

With-profits contracts are long-term contracts with minimal guaranteed amounts. Accordingly, thewith-profits fund investment strategy emphasizes a well-diversified equity portfolio (containing someinternational equities), real estate (predominantly in the United Kingdom), UK and international fixedincome securities and cash.

For Prudential’s UK pension annuities business and other non-participating business the objective isto maximize profits while ensuring stability by closely matching the cash flows of assets and liabilities.To achieve this matching, the strategy is to invest in fixed income securities of appropriate maturitydates.

For Prudential’s unit-linked business, the primary objective is to maximize investment returns subjectto following an investment policy consistent with the representations Prudential has made to itsunit-linked product policyholders.

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Investments

The following table summarizes the total investments of the UK insurance business at December 31,2007.

At December 31, 2007

TotalLess: assets excluding

to cover assets tolinked cover linked

liabilities liabilitiesand external and external

SAIF PAC Other Total unit holders unit holders

£m £m £m £m £m £m

Investment properties . . . . . . . 1,230 10,682 1,754 13,666 (1,030) 12,636Financial investments:

Loans . . . . . . . . . . . . . . . . 184 762 299 1,245 0 1,245Equity securities . . . . . . . . . 6,946 41,108 12,775 60,829 (12,374) 48,455Debt securities . . . . . . . . . . 4,595 33,458 19,127 57,180 (6,114) 51,066Other investments . . . . . . . . 244 2,658 489 3,391 (115) 3,276Deposits . . . . . . . . . . . . . . . 466 4,334 2,428 7,228 (1,418) 5,810

Total financial investments . . . . . 12,435 82,320 35,118 129,873 (20,021) 109,852

Total investments . . . . . . . . . . 13,665 93,002 36,872 143,539 (21,051) 122,488

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The following table shows additional analysis of the investments relating to Prudential’s UKinsurance business, excluding assets to cover linked liabilities and those attributable to external unitholders of consolidated unit trusts and similar funds, at December 31, 2007. The ‘‘Other’’ columnincludes investments relating to solvency capital of unit-linked funds and investments relating to non-lifelong-term business.

At December 31, 2007

Shareholder-With- backedProfits Annuities SAIF Other Total Total %

£m £m £m £m £m

Investment properties . . . . . . . . . . . . . . . . . . 10,682 724 1,230 0 12,636 10.3Financial investments:

Loans:Mortgage loans . . . . . . . . . . . . . . . . . . . 156 37 0 256 449Policy loans . . . . . . . . . . . . . . . . . . . . . 22 0 12 0 34Other loans . . . . . . . . . . . . . . . . . . . . . 584 6 172 0 762

Total loans and receivables . . . . . . . . . . . . . . 762 43 184 256 1,245 1.0Equity securities:

United Kingdom:Listed . . . . . . . . . . . . . . . . . . . . . . . . . 26,561 17 4,653 2 31,233Unlisted . . . . . . . . . . . . . . . . . . . . . . . . 203 90 5 0 298

Total United Kingdom . . . . . . . . . . . . . . . . . . 26,764 107 4,658 2 31,531 25.7

International:United States . . . . . . . . . . . . . . . . . . . . . . 2,341 0 340 0 2,681Europe (excluding the United Kingdom) . . . . 5,345 0 769 0 6,114Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,202 0 209 0 1,411Pacific (excluding Japan) . . . . . . . . . . . . . . 3,660 0 631 7 4,298Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,081 0 339 0 2,420

Total international . . . . . . . . . . . . . . . . . . . . 14,629 0 2,288 7 16,924 13.8

Total equity securities . . . . . . . . . . . . . . . . . . 41,393 107 6,946 9 48,455 39.5

Debt securities:UK government . . . . . . . . . . . . . . . . . . . . 2,216 892 116 79 3,303US government . . . . . . . . . . . . . . . . . . . . 192 46 44 1 283Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,687 12,235 4,435 123 47,480

Total debt securities . . . . . . . . . . . . . . . . . . . 33,095 13,173 4,595 203 51,066 41.7

Other investments:Participation in investment pools . . . . . . . . . . . 1,064 0 173 125 1,362Other financial investments . . . . . . . . . . . . . . 1,205 0 0 156 1,361Derivative asset . . . . . . . . . . . . . . . . . . . . . . 389 90 71 3 553

Total other investments . . . . . . . . . . . . . . . . . 2,658 90 244 284 3,276 2.8

Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 4,334 828 466 182 5,810 4.7

Total investments . . . . . . . . . . . . . . . . . . . . . 92,924 14,965 13,665 934 122,488 100.0

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Equity Securities

Prudential’s UK insurance operations, excluding assets to cover linked liabilities and thoseattributable to external unit holders of consolidated unit trusts and similar funds, had £48,455 millioninvested in equities at December 31, 2007. Most of these equities support Prudential Assurance’swith-profits fund and the SAIF fund, both of which are managed using the same general investmentstrategy. The following table shows the geographic spread of this equity portfolio by market value inaccordance with the policies described in note A4 of the notes to the consolidated financial statements.

At December 31, 2007

Market Value %

£m

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,531 65.1United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,681 5.5Europe (excluding United Kingdom) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,114 12.6Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,411 2.9Pacific (excluding Japan) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,298 8.9Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,420 5.0

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,455 100.0

The UK equity holdings are well diversified and broadly mirror the FTSE All-Share share index.Prudential held equities in 476 UK companies at December 31, 2007. The ten largest holdings in UKequities at December 31, 2007 amounted to £14,068 million, accounting for 44.6 per cent of the totalUK equity holdings of £31,531 million supporting the UK insurance operations. The following tableshows the market value of the ten largest holdings in UK equities at December 31, 2007.

At December 31, 2007

Market Value %

£m

BP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,057 9.7Vodafone Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,936 6.1HSBC Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,807 5.7Royal Dutch Shell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,493 4.7GlaxoSmithKline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,477 4.7Rio Tinto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,166 3.7Barclays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822 2.6The Royal Bank of Scotland Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809 2.6Anglo American . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 774 2.5British American Tobacco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 727 2.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,068 44.6

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All industry sectors are represented in Prudential’s equity portfolio. At December 31, 2007, withinthe £31,531 million in UK equities supporting the UK insurance operations, Prudential had£22,004 million, or 69.9 per cent of the holdings invested in ten industries. The following table showsthe primary industry concentrations based on market value of the portfolio of UK equities relating to theUK insurance business at December 31, 2007.

At December 31, 2007

Market Value %

£m

Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,318 16.9Oil and Gas Producers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,951 15.7Pharmaceuticals and Biotech . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,718 8.6Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,104 6.7Mobile Telecommunications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,004 6.4Travel and Leisure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,165 3.7Media . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,155 3.7Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,048 3.3Support Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778 2.5Life Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 763 2.4

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,004 69.9

Debt Securities

At December 31, 2007, of the debt securities held by the UK insurance operations, excluding assetsto cover linked liabilities and those attributable to external unit holders of consolidated unit trusts andsimilar funds, 92.9 per cent were issued by corporations and overseas governments other than the US,6.5 per cent were issued or guaranteed by the UK government and 0.6 per cent were issued orguaranteed by the US government. These guarantees relate only to payment and, accordingly, do notprovide protection against fluctuations in market price that may occur during the term of the fixedincome securities.

The following table shows the market value of the debt securities portfolio by maturity atDecember 31, 2007, in accordance with the policies described in note A4 to the consolidated financialstatements.

At December 31, 2007

Market Value %

£m

Securities maturing:Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735 1.4Over one year and up to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,648 15.0Over five years and up to ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,992 19.6Over ten years and up to fifteen years . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,098 15.9Over fifteen years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,593 48.1

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,066 100.0

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The following table shows debt securities by rating:

At December 31, 2007

Market Value %

£m

S&P—AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,921 35.1S&P—AA+ to AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,413 10.6S&P—A+ to A- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,373 22.3S&P—BBB+ to BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,089 10.0S&P—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 927 1.8

40,723 79.8

Moody’s—Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 999 2.0Moody’s—Aa1 to Aa3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 578 1.1Moody’s—A1 to A3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925 1.8Moody’s—Baa1 to Baa3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 476 0.9Moody’s—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 410 0.8

3,388 6.6

Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665 1.3Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,290 12.3

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,066 100.0

Real Estate

At December 31, 2007, Prudential’s UK insurance operations, excluding assets to cover linkedliabilities and those attributable to external unit holders of consolidated unit trusts and similar funds, had£12,636 million of investments in real estate. The following table shows the real estate portfolio by typeof investment. The real estate investments are shown at market value in accordance with the policiesdescribed in note A4 of the consolidated financial statements.

At December 31, 2007

Market Value %

£m

Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,959 47.2Shopping centers/commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,999 31.6Retail warehouses/industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,025 16.0Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0.0Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653 5.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,636 100.0

Approximately 53.4 per cent of the UK held real estate investment is located in London andSoutheast England (Buckinghamshire, Berkshire, East and West Sussex, Hampshire, Isle of Wight, Kent,Oxfordshire and Surrey) with 34.7 per cent located throughout the rest of the United Kingdom and theremaining 11.9 per cent located overseas.

Investments Relating to Prudential’s US Insurance Business

Strategy

The investment strategy of the US Operations, for business other than the variable annuity business,is to maintain a diversified and largely investment grade debt securities portfolio that maintains a desired

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investment spread between the yield on the portfolio assets and the rate credited on policyholderliabilities. Interest rate scenario testing is continually used to monitor the effect of changes in interestyields on cash flows, the present value of future profits and interest rate spreads.

The investment portfolio of the US Operations consists primarily of debt securities, although theportfolio also contains investments in mortgage loans, policy loans, common and preferred stocks,derivative instruments, cash and short-term investments and miscellaneous other investments.

Investments

The following table shows total investments relating to the US insurance business at December 31,2007.

At December 31, 2007

Variableannuity Fixedseparate annuity, GICaccount and otherassets business Total

£m £m £m

Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 8 8Financial investments:

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3,258 3,258Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 480 15,507Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 19,002 19,002Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 762 762Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 258 258

Total financial investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 23,760 38,787

Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 23,768 38,795

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The following table further analyzes the insurance investments of the US Operations, excluding theseparate account investments supporting the variable annuity business, at December 31, 2007.

December 31, 2007

£m %

Non-institutionalInvestment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 0.0Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,755 11.6Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429 1.8

Corporate securities and commercial loans . . . . . . . . . . . . . . . . . . . . . . . . 10,345 43.5Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,533 10.7Commercial mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,179 5.0Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 954 4.0

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,011 63.2

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 643 2.7Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 1.1

Total non-institutional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,104 80.4

InstitutionalInvestment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0.0Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 503 2.1Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 0.2

Corporate securities and commercial loans . . . . . . . . . . . . . . . . . . . . . . . . 2,613 11.0Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 406 1.7Commercial mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 353 1.5Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 2.6

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,991 16.8

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 0.5Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0.0

Total institutional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,664 19.6

TotalInvestment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 0.0Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,258 13.7Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 2.0

Corporate securities and commercial loans . . . . . . . . . . . . . . . . . . . . . . . . 12,958 54.5Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,939 12.4Commercial mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,532 6.5Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,573 6.6

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,002 80.0

Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 762 3.2Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 1.1

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,768 100.0

Under IFRS, debt securities are shown at fair value and loans are at amortized cost. Equitysecurities and investment properties are shown at fair value. The fair value of unlisted securities isestimated by Jackson using independent pricing services or analytically determined values.

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Debt Securities

Corporate Securities and Commercial Loans

At December 31, 2007, the US Operations had £12,958 million of corporate securities andcommercial loans, representing 54.5 per cent of US insurance total investments. Of the £12,958 million,£10,345 million consisted of debt securities that are publicly traded or trade under Rule 144A under theSecurities Act of 1933, as amended (‘‘Rule 144A’’) and £2,613 million consisted of investments innon-Rule 144A privately placed fixed income securities.

For statutory reporting in the United States, debt securities are classified into six quality categoriesspecified by the Securities Valuation Office of the National Association of Insurance Commissioners(‘‘NAIC’’). The categories range from Class 1 (the highest) to Class 6 (the lowest). Performing securitiesare designated Classes 1-5. Securities in or near default are designated Class 6. Securities designated asClass 3, 4, 5 and 6 are non-investment grade securities. Generally, securities rated AAA to A bynationally recognized statistical ratings organizations are Class 1, BBB in Class 2, BB in Class 3 and Band below in Classes 4 through 6. If a designation is not currently available from the NAIC, Jackson’sinvestment advisor, PPM America, provided the designation for the purposes of the disclosure containedherein.

The following table shows the credit quality of the portfolio of publicly traded and Rule 144A fixedincome securities at December 31, 2007.

At December 31, 2007

Book Value %

£m

NAIC Designation1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,338 41.92 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,194 50.33 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542 5.24 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 2.25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 0.46 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,345 100.0

The following table shows the credit quality of the non-Rule 144A private placement portfolio atDecember 31, 2007.

At December 31, 2007

Book Value %

£m

NAIC Designation1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011 38.72 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,351 51.73 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 7.94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 1.75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613 100.0

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Residential Mortgage-Backed Securities

At December 31, 2007, the US insurance operations had £2,939 million of residential mortgage-backed securities, representing 12.4 per cent of US insurance total investments. At December 31, 2007,86.5 per cent of the US insurance Operations’ residential mortgage-backed securities were rated AAA orthe equivalent by a nationally recognized statistical ratings organization (these include Standard & Poor’s,Moody’s and Fitch) and 99.8 per cent were rated NAIC 1.

The primary investment risk associated with residential mortgage-backed securities is that a changein the interest rate environment or other economic conditions could cause payment of the underlyingobligations to be made more slowly or more quickly than was anticipated at the time of their purchase.If interest rates decline, then this risk is called ‘‘pre-payment risk’’ and the underlying obligations willgenerally be repaid more quickly when the yields on reinvestment alternatives are lower. Alternatively, ifinterest rates rise, the risk is called ‘‘extension risk’’ and the underlying obligations will generally berepaid more slowly when reinvestment alternatives offer higher returns. Residential mortgage-backedsecurities offer additional yield to compensate for these risks. The US Operations can managepre-payment risk, in part, by reducing crediting rates on its products.

Commercial Mortgage-Backed Securities

At December 31, 2007, the US Operations had £1,532 million of commercial mortgage-backedsecurities, representing 6.5 per cent of US insurance total investments. 88.2 per cent of this total wasrated AAA or the equivalent by a nationally recognized statistical ratings organization (these includeStandard & Poor’s, Moody’s and Fitch) and 95.4 per cent was rated investment grade. Due to thestructures of the underlying commercial mortgages, these securities do not present the samepre-payment or extension risk as residential mortgage-backed securities.

Other Debt Securities

At December 31, 2007, the US Operations had £1,573 million of other debt securities, representing6.6 per cent of US insurance total investments.

Loans

Loans totaled £3,258 million, representing 13.7 per cent of US insurance total investments atDecember 31, 2007. Of the total, £2,841 million related to commercial mortgage loans and £417 millionto policy loans.

Commercial Mortgage Loans

Commercial mortgage loans represented 11.9 per cent of US insurance total investments atDecember 31, 2007. This total included 529 first mortgage loans with an average loan balance ofapproximately £5.2 million, collateralized by properties located in the United States and Canada.

Jackson has addressed the risk of these investments by building a portfolio that is diverse both ingeographic distribution and property type, emphasizing four main institutional property types: multi-family residential, retail, suburban office and warehouse/distribution facilities.

As of December 31, 2007, approximately 27.6 per cent of the portfolio was industrial, 23.2 percent multi-family residential, 21.8 per cent suburban office, 18.3 per cent retail, 7.6 per cent hotel and1.5 per cent other. Approximately 14.2 per cent of the portfolio is collateralized by properties inCalifornia, 8.7 per cent by properties in Arizona, 7.7 per cent by properties in Illinois and 7.5 per centby properties in Texas. No other state represents more than 6.1 per cent.

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Commercial mortgages generally involve more credit risk than residential mortgages due to severalfactors, including larger loan size, general and local economic conditions, local real estate conditions andthe credit quality of the underlying tenants for the properties. Jackson’s investment policy and strictunderwriting standards are designed to reduce these risks while maintaining attractive yields. In contrastto residential mortgage loans, commercial mortgage loans have minimal or no pre-payment andextension risk.

Policy Loans

Policy loans represented 1.8 per cent of US insurance total investments at December 31, 2007.Policy loans are fully secured by individual life insurance policies or annuity policies and are contractualarrangements made under the policy.

Equity Securities

Equity securities supporting US insurance operations, excluding separate account investments,totaled £480 million at December 31, 2007.

Other

Other financial investments of £762 million, representing 3.2 per cent of US insurance totalinvestments at December 31, 2007, were made up of £327 million of limited partnership interests,derivative assets of £390 million and £45 million of other miscellaneous investments.

The largest investment in the limited partnerships category is a £65 million interest in the PPMAmerica Private Equity Fund. The remainder of this category consists of diversified investments in 164other partnerships managed by independent money managers that generally invest in various equity andfixed income loans and securities.

Investments Relating to Asian Insurance Business

Prudential’s Asian insurance operations’ investments, excluding assets to cover linked liabilities andthose attributable to external unit holders of consolidated unit trusts and similar funds, largely supportthe business of Prudential’s Singapore, Hong Kong, Malaysia, Japan and Taiwan operations.

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The following table shows Prudential Corporation Asia’s investments at December 31, 2007. In thistable, investments are valued in accordance with the policies described in note A4 to the consolidatedfinancial statements.

At December 31, 2007

TotalLess: assets excluding

to cover assets tolinked cover

liabilities linkedand liabilities

With- Unit- external andprofits linked unit external

business assets Other Total holders unit holders %

£m £m £m £m £m £m

Investment properties . . . . . 0 0 14 14 0 14 0.1Financial investments:

Loans . . . . . . . . . . . . . . 560 37 490 1,087 (37) 1,050 9.5Equity securities . . . . . . . 4,472 4,728 604 9,804 (4,304) 5,500 49.9Debt securities . . . . . . . . 2,329 1,901 2,690 6,920 (2,756) 4,164 37.8Other investments . . . . . . 13 6 23 42 (6) 36 0.3Deposits . . . . . . . . . . . . 44 118 215 377 (118) 259 2.4

Total financial investments . . 7,418 6,790 4,022 18,230 (7,221) 11,009 99.9

Total investments . . . . . . . . 7,418 6,790 4,036 18,244 (7,221) 11,023 100.0

Prudential manages interest rate risk in Asia by matching liabilities with fixed interest assets of thesame duration to the extent possible. Asian fixed interest markets however generally have a relativelyshort bond issue term, which makes complete matching challenging. A large proportion of the HongKong liabilities are denominated in US dollars and Prudential holds US fixed interest securities to backthese liabilities.

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Debt Securities

The following table shows rating categorization of the debt security investments of PrudentialCorporation Asia’s long-term insurance fund, excluding assets to cover linked liabilities and thoseattributable to external unit holders of consolidated unit trusts and similar funds, at December 31, 2007.

At December 31, 2007

Market Value %

£m

S&P—AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,324 31.8S&P—AA+ to AA� . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,702 40.9S&P—A+ to A� . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210 5.0S&P—BBB+ to BBB� . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 0.8S&P—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 2.2

3,363 80.7

Moody’s—Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0Moody’s—Aa1 to Aa3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 0.6Moody’s—A1 to A3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 0Moody’s—Baa1 to Baa3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 0.2Moody’s—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 1.4

91 2.2

Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 710 17.1

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,164 100.0

Equity Securities

The following table shows a geographic analysis of equity security investments of PrudentialCorporation Asia’s long-term insurance fund, excluding assets to cover linked liabilities and thoseattributable to external unit holders of consolidated unit trusts and similar funds, at December 31, 2007.

At December 31, 2007

Market Value %

£m

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,250 59.1Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,773 32.2Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174 3.2Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 2.6Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 1.7Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 1.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,500 100.0

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Description of Property—Corporate Property

As at December 31, 2007, Prudential’s UK based businesses occupied approximately 27 propertiesin the United Kingdom, Europe and Mumbai. These properties are primarily offices with some ancillarystorage or warehouse facilities. Prudential’s headquarters are located in London. Of the remainder, themost significant are offices in London, Reading, and Chelmsford in England, Stirling in Scotland andMumbai in India. The property in Stirling is held on a freehold basis, and is leased by the business fromPrudential Assurance’s long-term fund. The rest of the properties occupied by Prudential’s UK basedbusinesses, both in the UK and in Mumbai, are held on long-term leaseholds. The leasehold propertiesrange in size from 2,000 to 270,000 square feet. Overall, the UK, Europe & Mumbai occupied propertyportfolio totals approximately 1,000,000 square feet.

In addition to these properties, the Prudential group owns the freehold of a sports facility inReading for the benefit of staff.

The Prudential group also holds approximately 50 other leasehold properties in the UnitedKingdom. This surplus accommodation is spread geographically across the United Kingdom and totalsapproximately 450,000 square feet.

In the United States, Prudential owns Jackson’s executive and principal administrative office locatedin Michigan. Prudential also leases premises in Michigan, Colorado, California, Illinois, New York, NewJersey, Georgia, Florida, Wisconsin, Texas, Massachusetts, Connecticut, New Hampshire, Pennsylvania,Virginia, Indiana and North Dakota for certain of its operations. Prudential holds 30 operating leaseswith respect to office space, throughout the United States. In the United States, Prudential owns andleases a total of approximately 866,242 square feet of property.

In Asia, Prudential owns or leases properties principally in Hong Kong, Singapore, Malaysia,Indonesia, Thailand, Philippines, China (JV), Taiwan, Japan, Vietnam, India (JV) and Korea. Within thesecountries, Prudential holds one office on a freehold (owned) basis, and 1,781operating leases in respectof office space, totalling approximately 7,600,000 square feet of property. In addition, Prudential isplanning to lease approximately 450,000 square feet of additional property in 2008 to support expansionplans throughout the region.

Prudential believes that its facilities are adequate for its present needs in all material respects.

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Competition

General

There are significant other participants in each of the financial service markets in which Prudentialoperates. Its competitors include both mutual and stock financial companies. In addition, regulatory andother developments in many of Prudential’s markets have obscured traditional financial service industrylines and opened the market to new competitors and increased competition. In some of Prudential’smarkets, other companies may have greater financial resources, allowing them to benefit from economiesof scale, and may have stronger brands than Prudential does in that market.

The principal competitive factors affecting the sale of Prudential’s products in its chosen marketsare:

• price and yields offered,

• financial strength and ratings,

• commission levels, charges and other expenses,

• range of product lines and product quality,

• brand strength, including reputation and quality of service,

• distribution channels,

• investment management performance, and

• historical bonus levels.

An important competitive factor is the ratings Prudential receives in some of its target markets,most notably in the United States, from recognized rating organizations. The intermediaries with whomPrudential works, including financial advisors, tied agents, brokers, wholesalers and financial institutionsconsider ratings as one factor in determining from which provider to purchase financial products.

Prudential Assurance Company is currently rated Aa1 (negative outlook) by Moody’s, AA+ (stableoutlook) by Standard & Poor’s, and AA+ (stable outlook) by Fitch. The ratings from Moody’s, Standard &Poor’s, and Fitch represent the second highest ratings of their respective rating categories.

Jackson is currently rated A1 (stable outlook) by Moody’s, AA (stable outlook) by Standard & Poor’sand AA (stable outlook) by Fitch. The ratings from Moody’s represent the fifth highest rating categoryand the ratings from Standard & Poor’s and Fitch represent the third highest rating categoryrespectively.

Prudential offers different products in its different markets of the United Kingdom, the UnitedStates and Asia and, accordingly, faces different competitors and different types of competition in thesemarkets. In all of the markets in which Prudential operates its products are not unique and, accordingly,it faces competition from market participants who manufacture a varying range of similar and identicalproducts.

Asia

Competition in the Asian markets in which Prudential operates is mainly focused on distribution,with particular emphasis on the size and competency of the agency sales force. Within Asia, Prudentialis second to AIG in terms of penetration and overall life market share across the region. Other mainregional competitors are Allianz, ING and Manulife. While there are large local participants in individualmarkets, for example, Great Eastern Life in Singapore and Malaysia, Nippon Life in Japan, Cathay Life inTaiwan, and LIC in India, none of these has pan-regional businesses. Regional players are typically ofNorth American or European origin.

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In addition, Prudential competes with the above as well as smaller competitors for talented andskilled employees with local experience, which are in particular demand in Asia. See Item 3 ‘‘KeyInformation-Risk Factors’’.

In the regional mutual fund market, in terms of market presence and position, Prudential ranksalongside leading international participants such as Templeton and Fidelity.

United States

Jackson’s competitors in the United States include major stock and mutual insurance companies,mutual fund organizations, banks and other financial services companies. National banks, in particular,may become more significant competitors in the future for insurers who sell annuities, as a result ofrecent legislation, court decisions and regulatory actions. Jackson’s principal life insurance companycompetitors in the United States include AXA Financial Inc., Hartford Life Inc., Lincoln National, AIG,ING, MetLife, Prudential Financial and TIAA-CREF.

Jackson does not have a significant career agency sales force to distribute its annuity products inthe United States and, consequently, competes for distributors such as banks, broker-dealers andindependent agents.

United Kingdom

Prudential’s principal competitors include many of the major stock and mutual retail financialservices and fund management companies operating in the United Kingdom. These companies includeAviva, Legal & General, Standard Life, Friends Provident, Lloyds TSB, HBOS, Aegon, AXA, ZurichFinancial Services, Fidelity, Invesco, Jupiter, Threadneedle and Schroders. Prudential competes with otherproviders of financial products to be included on financial advisors panels of preferred providers.

In the United Kingdom, the level of bonuses on Prudential’s with-profits products is an importantcompetitive measure for attracting new business through financial advisors. The ability to declarecompetitive bonuses depends, in part, on a company’s financial strength, which enables it to adopt aninvestment approach with a higher weighting in equities and real estate and allows it to smooth thefluctuations in investment performance upon which bonuses are based.

M&G’s principal competitors are the main fund management companies operating in the UnitedKingdom and Europe. These companies include Fidelity, Invesco Perpetual, Jupiter, Threadneedle, NewStar, Artemis, Schroders, Morley, Legal and General, Friends Provident, Aegon, AXA and Zurich FinancialServices.

Intellectual Property

Prudential does not operate in the United States under the Prudential name and there have beenlong-standing arrangements between it and Prudential Financial, Inc. and its subsidiary, the Prudentialinsurance Company of America, relating to their respective uses of the Prudential name. Prudential andPrudential Financial, Inc. entered into a new trade mark co-existence agreement in 2004, under which itwas agreed the Prudential Financial Inc would have the right to use the Prudential name in the Americasand certain parts of the Caribbean, Japan, Korea and Taiwan and Prudential would have the right to usethe name everywhere else in the world although third parties have rights to name in certain countries.

Legal Proceedings

Prudential Group

Prudential and its subsidiaries are involved in litigation arising in the normal course of business.While an adverse ruling in any individual case may not in itself be material to Prudential, if applied

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across all similar cases, the potential liabilities may be more significant. Although the outcome of suchmatters cannot be predicted with certainty, management believes that the ultimate outcome of suchlitigation will not have a material adverse effect on the group’s financial condition, results of operationsor cash flows.

Jackson

Jackson is involved as a defendant in class action litigation substantially similar to class actionlitigation pending against many life insurance companies that allege misconduct in the sale andadministration of insurance products. Jackson generally accrues a liability for legal contingencies withrespect to pending litigation once management determines that the contingency is probable andestimable. Accordingly, Jackson on April 30, 2008 had recorded an accrual of $35.0 million for classaction litigation. Management, based on developments to date, believes that the ultimate disposition ofthe litigation is not likely to have a material impact on Jackson’s financial condition or results ofoperations.

Sources

Throughout this annual report, Prudential describes the position and ranking of its overall businessand individual business units in various industry and geographic markets. The sources for suchdescriptions come from a variety of conventional sources generally accepted as relevant businessindicators by members of the financial services industry. These sources include information availablefrom the Association of British Insurers, the UK Department of Trade and Industry, Association of UnitTrusts and Investment Funds, Investment Management Association, Neilsen Net Ratings, Moody’s,Standard & Poor’s, Fitch, UBS, Life Insurance Marketing and Research Association, the Variable AnnuityResearch Data Service, referred to as VARDS, LIMRA International, Townsend and Schupp, TheAdvantage Group, the Life Insurance Association of Singapore, the Hong Kong Federation of Insurers,Life Insurance Association of Malaysia, Life Insurance Association of Taiwan and the Taiwanese SecuritiesInvestment Trust Consulting Association.

SUPERVISION AND REGULATION OF PRUDENTIAL

Prudential’s principal insurance and investment operations are in the United Kingdom, the UnitedStates and Asia. Accordingly, it is subject to applicable United Kingdom, United States and Asianinsurance and other financial services regulation which is discussed below.

UK Supervision and Regulation

The Financial Services and Markets Act 2000

Prudential’s insurance and investment businesses in the United Kingdom are regulated by the FSA,the statutory regulator granted powers under the Financial Services and Markets Act 2000 (the ‘‘2000Act’’). In addition, those businesses are subject to various United Kingdom laws (for example, the DataProtection Act 1998 in relation to the processing of customer data) some of which require the relevantPrudential entity to be licensed or registered.

Risk-Based Regulation

The FSA employs a risk-based regulatory approach to supervision under the 2000 Act pursuant towhich each regulated firm’s risk is assessed using a risk assessment methodology known as ARROW.This is a high-level review aimed at assessing the significance of a particular risk posing a threat to theFSA’s statutory objectives under the 2000 Act. These objectives relate to market confidence, publicawareness, consumer protection and the reduction of financial crime.

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The ARROW framework, supported by a ‘close and continuous’ relationship, is the core of the FSA’srisk-based approach to regulation. Using this process, the FSA will consider the particular risks a firmmight pose to its statutory objectives by assessing the impact and probability of particular risksmaterializing.

Overview of 2000 Act Regulatory Regime

Single Regulator

The FSA is the single regulator for all authorized persons with respect to regulated activities in thefinancial services sector. In this regard, the FSA is authorized to make rules and issue guidance inrelation to a wide sphere of activity encompassing the governance of a firm, the way it conducts itsbusiness and the prudential supervision of firms.

Permission to carry on ‘‘Regulated Activities’’

Under the 2000 Act, no person may carry on or purport to carry on a regulated activity by way ofbusiness in the United Kingdom unless he is an authorized person or is an exempt person. A firm whichis authorized by the FSA to carry on regulated activities becomes an authorized person for the purposesof the 2000 Act. ‘‘Regulated activities’’ are currently prescribed in the Financial Services and MarketsAct 2000 (Regulated Activities) Order 2001 (as amended) and include insurance and investmentbusiness, as well as certain other activities such as establishing, operating and winding up stakeholderpension schemes, the mediation of general insurance and certain mortgage mediation and lendingactivities.

Authorization Procedure

In granting an application for authorization by a firm, the FSA may delineate the scope of, andinclude such restrictions on, the grant of permission as it deems appropriate. In granting or varying theterms of a firm’s permissions, the FSA must ensure that the firm meets certain threshold conditions,which, among other things, require the firm to have adequate resources for the carrying on of itsbusiness, and to be a fit and proper person, having regard to all the circumstances.

Once authorized, and in addition to continuing to meet the threshold conditions to authorization,firms are obliged to comply with the FSA Principles for Businesses, which are high level principles forconducting financial services business in the United Kingdom. These include the maintenance ofadequate systems and controls, treating customers fairly and communicating with customers in a mannerthat is clear, fair and not misleading.

Moreover, the 2000 Act obliges firms to secure the FSA’s prior approval of the appointment ofindividuals performing certain important functions within a firm or on its behalf with respect to thecarrying on of regulated activities (approved persons).

Principles for Businesses

A key feature of the FSA regime is the existence of 11 ‘‘Principles for Businesses’’, by which allfirms are expected to abide. These cover key areas such as firms’ relationship with the FSA and theneed to act with integrity as well as to treat customers fairly.

The FSA has expressed the intention to move away from a detailed rules-based regime in favor of amore principle based approach to regulation, much of which would be directed by the Principles forBusinesses mentioned above. While firms may welcome this, they are also likely to face greateruncertainty as what would be deemed to be ‘‘compliant’ under such a regime and this is a concern inthe industry.

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Application of 2000 Act Regulatory Regime to Prudential

Each of Prudential’s principal UK insurance and investment businesses is subject to regulation andsupervision by the FSA in the carrying on of its regulated activities. The following discussion considers,in turn, the main features of the 2000 Act regime applicable to Prudential’s insurance and investmentbusinesses in the United Kingdom.

Regulation Applicable to Prudential’s Insurance and Investment Businesses

Supervision of Management and Change of Control of Authorized Firms

The FSA closely supervises the management of authorized firms through the approved personsregime, under which any appointment of persons who hold positions of significant influence within anauthorized firm must be pre-approved by the FSA.

The FSA also regulates the acquisition and increase of control over authorized firms. Under the2000 Act, any person proposing to acquire control of or increase control over an authorized firm mustfirst obtain the consent of the FSA. In considering whether to grant or withhold its approval to theacquisition of control, the FSA must be satisfied both that the acquirer is a fit and proper person andthat the interests of consumers would not be threatened by his acquisition of or increase in control.

‘‘Control’’ for these purposes includes a shareholding of 10% or more in an authorized firm or itsparent undertaking. In order to determine whether a person or a group of persons is a ‘‘controller’’ forthe purposes of the 2000 Act, the holdings (shares or voting rights) of the person and his ‘‘associates’’,if any, are aggregated. A person will be treated as increasing his control over an authorized firm, andtherefore requiring further approval from the FSA, if the level of his shareholding in the authorized firmor, as the case may be, its parent undertaking, increases by any threshold step. The threshold stepsoccur at 20 per cent, 33 per cent and 50 per cent.

Intervention and Enforcement

The FSA has extensive powers to investigate and intervene in the affairs of an authorized firm. The2000 Act imposes on the FSA statutory obligations to monitor compliance with the requirementsimposed by, and to enforce the provisions of, the 2000 Act, related secondary legislation and the rulesmade thereunder.

The FSA’s enforcement powers, which may be exercised against both authorized firms andapproved persons, include public censure, imposition of unlimited fines and, in serious cases, thevariation or revocation of permission to carry on regulated activities or of an approved person’sapproved status. In addition, the FSA may vary or revoke an authorized firm’s permission if it isdesirable to protect the interests of consumers or potential consumers, or if the firm has not engaged inregulated activity for 12 months, or if it is failing to meet the threshold conditions for authorization. TheFSA has further powers to obtain injunctions against authorized persons and to impose or seekrestitution orders where persons have suffered loss. Once the FSA has made a decision to takeenforcement action against an authorized or approved person (other than in the case of an applicationto the court for an injunction or restitution order), the person affected may refer the matter to theFinancial Services and Markets Tribunal. Breaches of certain FSA rules by an authorized firm may alsogive a private person who suffers loss as a result of the breach a right of action against the authorizedfirm for damages.

In addition to its ability to apply sanctions for market abuse, the FSA has the power to prosecutecriminal offences arising under the 2000 Act and insider dealing under Part V of the Criminal Justice Act1993 and breaches of money laundering regulations. The FSA has indicated that it is prepared toprosecute more cases in the criminal courts where appropriate.

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The FSA, although not a creditor, may seek administration orders under the Insolvency Act 1986 (asamended), present a petition for the winding-up of an authorized firm or have standing to be heard inthe voluntary winding-up of an authorized firm. It should be noted that insurers carrying on long-terminsurance business cannot voluntarily be wound up without the consent of the FSA.

FSA Conduct of Business Rules

The FSA’s Conduct of Business Rules apply to every authorized firm carrying on regulated activitiesand regulate the day-to-day conduct of business standards to be observed by authorized persons incarrying on regulated activities.

The FSA updated its Conduct of Business rules on November 1, 2007 in response to the adoptionin the EU of the Markets in Financial Instruments Directive (‘‘MiFID’’). The new Conduct of Businessrules incorporate the requirements of MiFID which relate to investment business, and now place greaterreliance on principles and higher-level rules.

The scope and range of obligations imposed on an authorized firm under the Conduct of BusinessRules varies according to the scope of its business and the range of its clients. Generally speaking,however, the obligations imposed on an authorized firm by the Conduct of Business Rules will includethe need to classify its clients according to their level of sophistication, provide them with informationabout the firm, meet certain standards of product disclosure, ensure that promotional material which itproduces is clear, fair and not misleading, assess suitability when advising on certain products, manageconflicts of interest, report appropriately to its clients and provide certain protections in relation to clientassets.

Treating Customers Fairly

The FSA’s Treating Customers Fairly initiative (‘‘TCF’’) is an important example of its principles-basedapproach to regulation. This initiative is based upon Principle 6 of the FSA’s Principles for Businesses(that a firm must pay due regard to the interests of its customers and treat them fairly). The FSA hasdefined six outcomes it is seeking from this initiative. These are that:

• Consumers can be confident that they are dealing with firms where the fair treatment ofcustomers is central to the corporate culture;

• Products and services marketed and sold in the retail market are designed to meet the needs ofidentified consumer groups and are targeted accordingly;

• Consumers are provided with clear information and are kept appropriately informed before,during and after the point of sale;

• Where consumers receive advice, the advice is suitable and takes account of their circumstances;

• Consumers are provided with products that perform as firms have led them to expect, and theassociated service is both of an acceptable standard and as they have been led to expect; and

• Consumers do not face unreasonable post-sale barriers imposed by firms to change product,switch provider, submit a claim or make a complaint.

Although the FSA has, with the exception of rules relating to with-profits policyholders, refrainedfrom making detailed rules on how to comply with TCF, it has published a number of case studiesproviding an indication of its expectations of authorized firms in the areas of product development,complaint handling, financial promotions and systems and controls. In addition, the FSA set two newdeadlines for firms—authorized firms were expected by March 31, 2008 to have appropriatemanagement information or measures in place to test whether or not they are treating their customers

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fairly; and by December 31, 2008 firms must be able to demonstrate they are consistently treatingcustomers fairly.

Prudential Supervision

As set out above, in order to maintain authorized status under the 2000 Act, a firm must continueto satisfy the threshold conditions, which, among other things, require the firm to have adequateresources for the carrying on of its business. The FSA has published detailed rules relating to themaintenance of minimum levels of regulatory capital for insurance and investment businesses in thePrudential Standards section of its Handbook.

The FSA’s regulatory capital rules for insurers and investment firms are primarily contained in theFSA’s General Prudential Sourcebook, Prudential Sourcebook for Banks, Building Societies andInvestment Firms and Prudential Sourcebook for Insurers. Although it has been the intention in recentyears of the FSA to move towards a unified prudential regime for firms which it authorizes, the FSA hasbeen obliged to revise this approach and its rules to accommodate developments at an internationallevel, including EU legislation relating to the regulatory capital requirements for investment firms andfinancial groups.

The Financial Ombudsman Service

Authorized firms must have appropriate complaints handling procedures. However, once theseprocedures have been exhausted, qualifying complainants may turn to the Financial Ombudsman Servicewhich is intended to provide speedy, informal and cost effective dispute resolution of complaints madeagainst authorized firms by individuals and small-business customers. The Ombudsman is empowered toorder firms to pay fair compensation for loss and damage and may order a firm to take such steps as itdetermines to be just and appropriate to remedy a complaint.

The Financial Services Compensation Scheme (‘‘FSCS’’)

The FSCS is intended to compensate individuals and small businesses for claims against anauthorized firm where the authorized firm is unable or unlikely to be able to meet those claims(generally, when it is insolvent or has gone out of business). The scheme is divided into threesub-schemes of banking, insurance and investment business, reflecting the different kinds of businessundertaken by authorized firms. The scheme is funded by contributions from industry participantsreferable to the particular sub-schemes so as to minimize cross-subsidy between authorized personswhose businesses are not similar. In the event of a failure of a market participant, Prudential could berequired to make contributions to compensate investors. In November 2007, the FSA confirmed itsintention to introduce a new model of funding, under which the first tranche of compensation costsemerging from a particular group of firms is borne by that group alone, while costs above a specifiedthreshold are shared out more widely. The new FSCS funding model came into force on April 1, 2008.

Regulation of Insurance Business

Effecting and carrying out contracts of insurance as principal are regulated activities for thepurposes of the 2000 Act, and the carrying on of such regulated activities is referred to as insurancebusiness. Some of Prudential’s subsidiaries, including The Prudential Assurance Company Limited,Prudential Annuities Limited, Prudential Retirement Income Limited, Prudential Pensions Limited,Prudential Holborn Life Limited and Prudential (AN) Limited carry on insurance business in the UnitedKingdom with the permission of the FSA and are regulated by the FSA under the 2000 Act.

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Conduct of business requirements for insurance business

The Conduct of Business rules issued by the FSA apply differing requirements to the sale of generaland long term insurance contracts. Authorized firms which advise and sell to private customers packagedproducts such as life insurance policies are subject to detailed conduct of business obligations relating toproduct disclosure, assessment of suitability, the range and scope of the advice which the firm provides,and fee and remuneration arrangements.

The FSA launched a Retail Distribution Review in 2006 with the specific aim of improving the retailinvestment market. In June 2007 it set out its initial proposals on how to address the causes ofproblems which emerge in this market. There are expected to be further consultations anddevelopments to improve the efficiency of the distribution of retail investment products.

Capital rules for insurers

The FSA’s rules which govern the prudential regulation of insurers are found in the PrudentialSourcebook for Insurers, the General Prudential Sourcebook and the Interim Prudential Sourcebook forInsurers. Overall, the requirements of the General Prudential Sourcebook are intended to align thecapital adequacy requirements for insurance businesses more closely with those of banking andinvestment firms and building societies, for example, by addressing tiers of capital, rather than looking atnet admissible assets.

The FSA’s rules now require an insurer to prepare and submit to the FSA its own assessment of itscapital requirements, known as an individual capital assessment (‘‘ICA’’), based on the risks it faces. TheFSA will use the ICA in order to form its own view of a firm’s capital requirements and if it disagreeswith the ICA it will issue individual capital guidance (‘‘ICG’’) which it can impose as a requirement.

The rules also require that insurance companies maintain assets sufficient to meet the relevantcapital requirement at all times in respect of both any long-term insurance and general insuranceundertaken by the insurance company, the calculation of which requirement in any particular case beingdependent on the type and amount of insurance business a company writes. The method of calculationof the capital requirement is set out in the General Prudential Sourcebook and the level of an insurer’scapital resources is also determined in accordance with the rules set out in that Sourcebook. Failure tomaintain the required capital resources requirement is one of the grounds on which wide powers ofintervention conferred upon the FSA may be exercised.

Under the rules in the General Prudential Sourcebook, an insurer must hold capital resources equalat least to the Minimum Capital Requirement (the ‘‘MCR’’). Insurers with with-profits liabilities of morethan £500 million must hold capital equal to the higher of MCR and the Enhanced Capital Requirement(the ‘‘ECR’’). The ECR is intended to provide a more risk responsive and ‘‘realistic’’ measure of awith-profits insurer’s capital requirements, whereas the MCR is broadly speaking equivalent to theprevious required minimum margin under the Interim Prudential Sourcebook for Insurers and satisfiesthe minimum EU standards.

Determination of the ECR involves the comparison of two separate measurements of the firm’sfinancial resources requirements, which the FSA refers to as the ‘‘twin peaks’’ approach. The term twinpeaks is meant to reflect the fact that capital is determined by reference to the higher of the two basesfor calculating liabilities (regulatory or realistic). The regulatory basis reflects strict contractual liabilitieswhereas the realistic one includes more discretionary but expected benefits, including those required totreat customers fairly.

Long-term business assets and liabilities—those assets and liabilities relating to, broadly, life andhealth insurance policies—must be segregated from the assets and liabilities attributable to non-lifeinsurance business or to shareholders. Separate accounting and other records must be maintained and aseparate fund must be established to hold all receipts of long-term business.

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The extent to which long-term fund assets may be used for purposes other than long-term businessis restricted by the rules in the Prudential Sourcebook for Insurers. Only the ‘‘established surplus’’—theexcess of assets over liabilities in the long-term fund, as determined by an actuarial investigation—maybe transferred so as to be available for other purposes. Restrictions also apply to the payment ofdividends by the insurance company, as described below. The rules in the Prudential Sourcebook forInsurers require, in addition to the capital requirements referred to below, the maintenance of sufficientassets in the separate long term insurance fund to cover the actuarially determined value of theinsurance liabilities.

Actuarial functions

The rules in the FSA’s Supervision Manual require that every insurance company that carries onlong-term business must appoint one or more actuaries to perform the ‘‘actuarial function’’ in respect ofall classes of its long-term insurance business and, if it has any with-profits business, the ‘‘with-profitsactuary function’’ in respect of all classes of that with-profits business.

The actuary performing the ‘‘actuarial function’’ must prepare an annual report for the company’sdirectors quantifying the company’s long-term liabilities attributable to the insurance company’slong-term insurance business, determining the value of any excess over those liabilities of the assetsrepresenting the long-term insurance fund and where any rights of long-term policyholders to participatein profits relate to particular parts of such a fund, a valuation of any excess of assets over liabilities inrespect of each of those parts.

The actuary performing the ‘‘with-profits actuary function’’ must advise the firm’s management, atthe level of seniority that is reasonably appropriate, on key aspects of the discretion to be exercisedaffecting those classes of the with-profits business of the firm in respect of which he has beenappointed. He must also, at least once a year report to the firm’s governing body on key aspects(including those aspects of the firm’s application of its Principles and Practices of Financial Management(‘‘PPFM’’) on which the advice described has been given) of the discretion exercised in respect of theperiod covered by his report affecting those classes of with-profits business of the firm.

Distribution of Profits and With-profits Business

The Interim Prudential Sourcebook for Insurers provides that, once an allocation of surplus in awith-profits fund has been made to policyholders, no transfer of assets representing any part of asubsequent surplus can be made, to shareholders or otherwise, unless either the ‘‘relevant minimum’’ (asdefined in the Interim Prudential Sourcebook for Insurers) of the surplus has been allocated topolicyholders or a statutory notification procedure has been followed. Calculation of the relevantminimum is based upon the percentage of the relevant surplus previously allocated to eligiblepolicyholders.

There has been considerable public debate regarding the rights and legitimate expectations ofwith-profits policyholders to assets forming part of an insurance company’s surplus, particularly wheresuch assets do not derive from the payment of current policyholders’ premiums but are rather‘‘inherited’’ from previous generations of policyholders or from other entities. In December 2007 theFSA published guidance on the reattribution of a firm’s inherited estate. The Treasury Committee of theHouse of Commons announced in February 2008 an inquiry into the inherited estate held by lifeassurance companies’ with-profits endowment funds.

The FSA has also mandated that firms carrying on with-profits business must:

• define and make publicly available the PPFM applied in their management of with-profits funds,

• ensure their governance arrangements offer assurance that they have managed their funds in linewith the PPFM they have established and published,

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• produce annual reports for with-profits policyholders on how they have complied with thisobligation, including how they have addressed any competing or conflicting rights, interests orexpectations of policyholders and, if applicable, shareholders,

• comply with (i) modified regulatory reporting requirements designed to achieve the FSA’sobjective of making directors and senior management more explicitly responsible for setting uptechnical provisions and other decisions taken on actuarial advice and (ii) new audit requirementsfor liabilities, and

• comply with consequential changes to certification in the insurance returns.

Since April 1, 2004, firms carrying on with-profits business have been required to produce PPFMand to make them publicly available. From the same date, firms have also been required to have in placethe relevant governance arrangements and reporting procedures to with-profits policyholders.

Treating Customers Fairly and with-profits business

One of the areas of focus of the FSA’s TCF initiative has been with-profit business. The FSA hasissued specific rules on this area in relation to with-profits policyholders, which address, among otherthings, the costs charged to a with-profits fund by the firm managing the fund; penalties and chargeslevied on policyholders who surrender their policies early, the need for funds to be managed with theobjective of ensuring that maturity payouts fall within a target range set for the fund; and the provisionof information to with-profits policyholders or potential policyholders in a format that they can morereadily understand—through the introduction of ‘‘Consumer Friendly Principles and Practices of FinancialManagement’’ (‘‘CFPPFMs’’).

In addition, life insurers writing with-profits business must provide information to with-profitspolicyholders within 28 working days of a decision to close a fund to new business or of theappointment of a policyholder advocate to protect the interest of policyholders should a firm decide tomake a reattribution of its inherited estate.

Reporting Requirements

The main financial reporting rules for insurers are contained in the Interim Prudential Sourcebookfor Insurers. Insurance companies must file a number of items with the FSA, including their auditedannual accounts and balance sheets and life insurers annual reports from the actuary performing theactuarial function.

Transfer of Insurance Business

Before any transfer of insurance business may take place, the 2000 Act requires a scheme oftransfer to be prepared and approved by the High Court.

Winding-Up Rules

The general insolvency laws applicable to UK companies are modified in certain respects in relationto insurance companies. Since the introduction of the Financial Services and Markets Act 2000(Administration Orders Relating to Insurers) Order 2002 (the ‘‘2002 Order’’), which came into force inMay 2002, insurance companies in the United Kingdom have become subject to the administrationprocedures contained in Part II of the Insolvency Act 1986 (which previously did not apply). Theseadministration procedures have, however, also been slightly modified by the 2002 Order in relation to,for example, the power of an administrator to make any payments due to a creditor.

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Additionally, in the United Kingdom, all FSA authorized insurance companies, except for purereinsurers, are subject to the Insurers (Reorganization and Winding-up) Regulations 2004, which cameinto force in February 2004.

These Regulations provide, among other things, that direct insurance claims will have priority overthe claims of other unsecured creditors (with the exception of preferred creditors), including reinsurancecreditors, on a winding-up by the court or a creditors’ voluntary winding up of the insurance company.Furthermore, instead of making a winding-up order when an insurance company has been proved unableto pay its debts, a UK court may, under Section 377 of the 2000 Act, reduce the amount of one or moreof the insurance company’s contracts on terms and subject to conditions (if any) which the courtconsiders fit. Where an insurance company is in financial difficulties but not in liquidation, the FinancialServices Compensation Scheme may take measures for securing the transfer of all or part of thebusiness to another insurance company.

Section 376 of the 2000 Act provides further insolvency protection to policyholders of insurancecompanies effecting or carrying out contracts of long-term insurance. Unless the court orders otherwise,a liquidator must carry on the insurer’s business so far as it consists of carrying out the insurer’scontracts of long-term insurance with a view to it being transferred as a going concern to a person whomay lawfully carry out those contracts. In carrying on the business, the liquidator may agree to thevariation of any contracts of insurance in existence when the winding-up order is made, but must noteffect any new contracts of insurance.

EU Directives on groups

Prudential is subject to the capital adequacy requirements of the Insurance Groups Directive(‘‘IGD’’) as implemented in the FSA’s rules. The IGD pertains to groups whose activities are primarilyconcentrated in the insurance sector, and applies for Prudential from December 2007, following the saleof Egg Banking during 2007. Prior to this, Prudential was required to meet the requirements of theFinancial Conglomerates Directive (‘‘FCD’’) as implemented in the FSA rules, as Prudential was classifiedas an insurance conglomerate.

Prudential’s move during 2007 from being treated as an insurance conglomerate to being treated asan insurance group under the FSA rules did not have a significant impact on the Group, as the FSA’sprudential requirements pertaining to insurance groups are very similar to those applying to insuranceconglomerates.

Due to the geographically diverse nature of Prudential’s operations, the application of theserequirements to Prudential is complex. In particular, for many of our Asian operations, the assets,liabilities and capital requirements have to be recalculated based on FSA regulations as if the companieswere directly subject to FSA regulation.

New EU Solvency Framework

The European Commission is continuing to develop a new prudential framework for insurancecompanies, ‘the Solvency II project’ that will update the existing life, non-life, re-insurance and insurancegroups directives. The main aim of this framework is to ensure the financial stability of the insuranceindustry and protect policyholders through establishing solvency requirements better matched to thetrue risks of the business. Like Basel 2, the new approach is expected to be based on the concept ofthree pillars—minimum capital requirements, supervisory review of firms’ assessments of risk andenhanced disclosure requirements. However, the scope is wider than Basel 2 and will cover valuations,the treatment of insurance groups, the definition of capital and the overall level of capital requirements.

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A key aspect of Solvency II is the focus on a supervisory review at the level of the individual legalentity. Insurers will be encouraged to improve their risk management processes and will be allowed tomake use of internal value-at-risk models to calculate capital charges for market risks.

The European Commission (‘‘EC’’) published a proposal for a Directive setting out high-levelprinciples on July 10, 2007 and an amended proposal was published on February 26, 2008. Theseprinciples will be supplemented by implementing measures that will be adopted by the EC andtransposed into national law by EU Member States. These implementing measures are then expected tocome into force around 2012.

Other EU Measures

On November 16, 2005, the Council and the European Parliament adopted Directive 2005/68/ECon reinsurance (the ‘‘Reinsurance Directive’’), which Member States were obliged to transpose intonational law by December 10, 2007. The Reinsurance Directive requires all reinsurance undertakings toseek authorization in their home Member State. Once they have obtained authorization, they will be freeto conduct business in other EEA states. In the UK, where reinsurance is already fully regulated, the FSAhas made the necessary changes to its rules to implement the Reinsurance Directive.

Regulation of Investment Business

Certain of Prudential’s subsidiaries are authorized by the FSA to carry on investment business.These entities are subject to regulation and supervision by the FSA and must comply with the FSAconduct of business and prudential rules made under the 2000 Act.

Conduct of business requirements for investment businesses and the Markets in Financial InstrumentsDirective (‘‘MiFID’’)

MiFID, unlike its predecessor legislation, the Investment Services Directive, sets out detailed andspecific requirements in relation to organizational and conduct of business matters for investment firmsand regulated markets. In particular, MiFID and its implementing measures make specific provision inrelation to, among other things, organizational requirements, outsourcing, customer classification,conflicts of interest, best execution, client order handling and suitability and appropriateness, andinvestment research and financial analysis, pre- and post trade transparency obligations, transactionreporting and substantial changes to the responsibility for the supervision of cross border investmentservices.

As noted above, changes to the FSA’s Conduct of Business rules came into effect on November 1,2007 in accordance with the requirements of MiFID.

Capital requirements for investment businesses

The FSA’s capital requirements for investment businesses are also contained in the PrudentialStandards section of its Handbook, primarily in the General Prudential Sourcebook and the PrudentialSourcebook for Banks, Building Societies and Investment firms. These rules implement the requirementsof European Union legislation relating to the prudential supervision of investment firms, including theCapital Adequacy Directive (Directive 93/6/EEC), as re-cast by the Capital Requirements Directive(Directive 2006/49/EC).

US Supervision of M&G Investment Management

One of Prudential’s UK subsidiaries, M&G Investment Management Limited, is also regulated by theUnited States’ Securities and Exchange Commission so that it can act as investment advisor to aUS mutual fund.

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US Supervision and Regulation

General

Prudential conducts its US insurance activities through Jackson, a stock life insurance companylicensed to transact its insurance business in, and subject to regulation and supervision by, the District ofColumbia, the Cayman Islands and 49 of the 50 states; Jackson operates a subsidiary, Jackson NationalLife Insurance Company of New York, in the state of New York. The extent of such regulation varies, butmost jurisdictions have laws and regulations governing the financial aspects of insurance companies,including standards of solvency, reserves, reinsurance and capital adequacy and the business conduct ofinsurance companies. In addition, statutes and regulations usually require the licensing of insurers andtheir agents and the approval of policy forms and related materials. These statutes and regulations inJackson’s state of domicile, which is Michigan, also regulate the investment activities of insurers.

Insurance regulatory authorities in the jurisdictions in which Jackson does business require it to filedetailed quarterly and annual financial statements, and these authorities have the right to examine itsoperations and accounts. In addition, Jackson is generally subject to federal and state laws andregulations that affect the conduct of its business. New York and Michigan require their state insuranceauthorities to conduct an examination of an insurer under their jurisdiction at least once every fiveyears. The New York insurance authorities completed an examination of Jackson National Life of NewYork in 2007 for the exam period of January 1, 2003 through December 31, 2005. The final report ofexamination did not include any material findings. Michigan insurance authorities completed a routineexamination of Jackson in 2006 for the period January 1, 2001 through December 31, 2004. The finalreport of examination did not include any material findings.

Jackson’s ability to pay shareholder dividends is limited under Michigan insurance law. TheCommissioner of the Michigan Office of Financial and Insurance Regulation (the ‘‘Michigan InsuranceCommissioner’’) may limit, or not permit, the payment of shareholder dividends if the MichiganInsurance Commissioner determines that an insurer’s surplus, as regards policyholders, is not reasonablein relation to its outstanding liabilities and is not adequate to meet its financial needs as required byMichigan insurance law. Jackson must report any shareholder dividends to the Michigan InsuranceCommissioner before they can be paid. In the case of an extraordinary shareholder dividend ordistribution, an insurer may not pay the dividend or distribution until 30 days after the MichiganInsurance Commissioner has received notice of the declaration and has not disapproved, or hasapproved, the payment within that period. For this purpose, an extraordinary dividend or distributionmeans any dividend or distribution of cash or other property where the fair market value, together withthat of other dividends or distributions that an insurer made within the preceding twelve months,exceeds the greater of 10 per cent of the insurer’s surplus, as regards policyholders as of December 31of the immediately preceding year, or the net gain from operations of the insurer, not including realizedcapital gains, for the prior year. In 2005, 2006 and 2007, Jackson paid shareholder dividends of$410.8 million, $209.10 million, and $246.0 million, respectively. The dividends paid includedextraordinary dividends, approved by the Michigan Insurance Commissioner, of $260.8 million in 2005to fund the purchase of Life of Georgia.

State regulators also require prior notice or regulatory approval of changes in control of an insureror its holding company and of certain material transactions with affiliates. Under New York and Michiganinsurance laws and regulations, no person, corporation or other entity may acquire control of aninsurance company or a controlling interest in any parent company of an insurance company, unless thatperson, corporation or entity has obtained the prior approval of the regulator for the acquisition. For thepurpose of each of New York and Michigan law, any person acquiring, directly or indirectly, 10 per centor more of the voting securities of an insurance company is presumed to have acquired ‘‘control’’ of thecompany. To obtain approval of any change in control, the proposed acquiror must file an applicationwith the New York Superintendent of Insurance or the Michigan Insurance Commissioner, as appropriate.

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This application requires the proposed acquiror to disclose, among other information, its background,financial condition, the financial condition of its affiliates, the source and amount of funds by which itwill effect the acquisition, the criteria used in determining the nature and amount of consideration to bepaid for the acquisition, proposed changes in the management and operations of the insurance companyand other related matters.

Guaranty Associations and Similar Arrangements

Each of the 50 states of the United States, the District of Columbia and the Commonwealth ofPuerto Rico have laws requiring insurance companies doing business within their jurisdictions toparticipate in various types of guaranty associations or other similar arrangements. These associationsand arrangements provide certain levels of protection to policyholders from losses under insurancepolicies issued by insurance companies that become impaired or insolvent. Typically, these associationslevy assessments, up to prescribed limits, on member insurers on a basis that is related to the memberinsurer’s proportionate share of the business in the relevant jurisdiction of all member insurers in thelines of business in which the impaired or insolvent insurer is engaged. Some jurisdictions permitmember insurers to recover assessments that they paid through full or partial premium tax offsets,usually over a period of years. Prudential estimated its reserve for future guarantee fund assessments forJackson to be £8.9 million ($17.7 million) at December 31, 2007. Prudential believes this reserve to beadequate for all anticipated payments for known insolvencies.

Asset Valuation Reserve

State regulators generally require that insurers establish an asset valuation reserve that consists oftwo components: a ‘‘default component’’ to provide for future credit-related losses on fixed incomeinvestments and an ‘‘equity component’’ to provide for losses on all types of equity investments. Theasset valuation reserve establishes statutory reserves for fixed maturity securities, equity securities,mortgage loans, equity real estate and other invested assets. The reserve is designed to provide for anormalized level of future defaults based on the credit rating of each individual investment. The level ofreserves is based on both the type of investment and its rating. Contributions to the reserve may resultin a slower growth in surplus or a reduction of Jackson’s unassigned surplus, which, in turn, may reducefunds available for shareholder distributions. The extent of the impact of the asset valuation reserve onJackson’s statutory surplus depends in part on the future composition of the investment portfolio.

Interest Maintenance Reserve

State regulators generally require that insurers establish an interest maintenance reserve to defernon-credit-related realized capital gains and losses, net of taxes, on fixed income investments (primarilybonds and mortgage loans) which are amortized into net income over the estimated remaining periodsto maturity of the investments sold and to defer material gains or losses, net of taxes, resulting frommarket value adjustments on policies and contracts backed by assets carried at book value. The extentof the impact of the interest maintenance reserve on earnings and surplus depends on the amount offuture interest-rate related realized capital gains and losses on fixed maturity investments and deferredgains or losses resulting from market value adjustments on policies and contracts backed by assets thatare valued at book value.

The National Association of Insurance Commissioners Ratios

On the basis of statutory financial statements that insurers file with state insurance regulators, theNational Association of Insurance Commissioners annually calculates twelve financial ratios to assist stateregulators in monitoring the financial condition of insurance companies. A usual range of results for eachratio is used as a benchmark and departure from the usual range on four or more of the ratios can lead

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to inquiries from individual state insurance departments. In 2007, all of Jackson’s ratios fell within theusual range.

Policy and Contract Reserve Sufficiency Analysis

State insurance laws require life insurance companies to conduct annually an analysis of thesufficiency of its life and annuity reserves. A qualified actuary must submit an opinion that states thatthe reserves, when considered in the light of the assets that an insurance company holds with respect tosuch reserves, make good and sufficient provision for the associated contractual obligations and relatedexpenses of the insurance company. If a qualified actuary cannot provide such an opinion, then theinsurance company must set up additional reserves by moving funds from surplus. The 2007 opinion hasbeen submitted to the Michigan Office of Financial and Insurance Services without any qualifications.

Jackson’s Capital and Surplus

Michigan insurance law requires Jackson, as a domestic stock life insurance company, to maintain atleast $7,500,000 in unimpaired capital and surplus. In addition, insurance companies are required tohave sufficient capital and surplus to be safe, reliable and entitled to public confidence.

As a licensed insurer in the District of Columbia and every state but New York, where it operatesthrough a subsidiary, Jackson is subject to the supervision of the regulators of each jurisdiction. Inconnection with the continual licensing of Jackson, regulators have discretionary authority to limit orprohibit the new issuance of business to policyholders when, in their judgment, the regulators determinethat such insurer is not maintaining minimum surplus or capital or if the further transaction of businesswill be hazardous to policyholders.

Risk-based Capital

The National Association of Insurance Commissioners has developed risk-based capital standards forlife insurance companies as well as a model act for state legislatures to enact. The model act requiresthat life insurance companies report on a formula-based, risk-based capital standard that they calculateby applying factors to various asset, premium and reserve items. The formula takes into account the riskcharacteristics of a company, including asset risk, insurance risk, interest rate risk and business risk. TheNational Association of Insurance Commissioners designed the formula as an early warning tool toidentify potentially inadequately capitalized companies for purposes of initiating regulatory action. TheNational Association of Insurance Commissioners intended the formula as a regulatory tool only and didnot intend it as a means to rank insurers generally. The model act imposes broad confidentialityrequirements on those engaged in the insurance business (including insurers, agents, brokers andothers) and on state insurance departments as to the use and publication of risk-based capital data.

Any state adopting the model act gives the state insurance commissioner explicit regulatoryauthority to require various actions by, or take various actions against, insurance companies whoseadjusted capital does not meet minimum risk-based capital standards. The Michigan InsuranceCommissioner takes into account the National Association of Insurance Commissioners’ risk-based capitalstandards to determine adequate compliance with Michigan insurance law.

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Effective December 31, 2005, the National Association of Insurance Commissioners implementednew requirements, referred to as C-3 Phase II, for calculating risk based capital in connection withvariable annuity products with death and living benefit guarantees. These changes did not have amaterial effect on Jackson, and at December 31, 2007, the Company’s total adjusted capital under theNational Association of Insurance Commissioners’ definition substantially exceeded Michigan standards.

Regulation of Investments

Jackson is subject to state laws and regulations that require diversification of its investmentportfolio, limit the amount of investments in certain investment categories such as below investmentgrade fixed income securities, common stock, real estate and foreign securities and forbid certain othertypes of investments altogether. Jackson’s failure to comply with these laws and regulations would causeinvestments exceeding regulatory limitations to be treated by the Michigan Insurance Commissioner asnon-admitted assets for purposes of measuring surplus and, in some instances, the Michigan InsuranceCommissioner could require divestiture of non-qualifying investments.

USA Patriot Act

The USA Patriot Act, enacted in 2001, includes numerous provisions designed to fight internationalmoney laundering and to block terrorist access to the US financial system. The US Treasury Departmenthas issued a number of regulations implementing the Patriot Act that apply certain of its requirements tofinancial institutions including broker dealers and insurance companies. Among other things, theregulations impose obligations on financial institutions to maintain appropriate policies, procedures andcontrols to detect, prevent and report money laundering and terrorist financing. Jackson has establishedpolicies and procedures to ensure compliance with the Patriot Act’s provisions and the TreasuryDepartment regulations.

Securities Laws

Jackson, certain of its affiliates and certain policies and contracts that Jackson offers are subject tovarious levels of regulation under the federal securities laws that the US Securities and ExchangeCommission (the ‘‘SEC’’) administers.

The primary intent of these laws and regulations is to protect investors in the securities markets andgenerally grant supervisory agencies broad administrative powers, including the power to limit or restrictthe conduct of business for failure to comply with such laws and regulations. Jackson may also besubject to similar laws and regulations in the states in which it provides investment advisory services,offers the products described above or conducts other securities-related activities.

Jackson National Asset Management, LLC is registered with the SEC as an investment adviserpursuant to the Investment Advisers Act of 1940, as amended (‘‘Investment Advisers Act’’). JacksonNational Asset Management, LLC is registered as a transfer agent pursuant to the Securities ExchangeAct of 1934, as amended (‘‘Securities Exchange Act’’). The investment companies (mutual funds) forwhich Jackson National Asset Management, LLC serves as an investment adviser are subject to SECregistration and regulation pursuant to the Securities Act of 1933, as amended (‘‘Securities Act’’), andthe Investment Company Act of 1940, as amended (‘‘Investment Company Act’’). In addition, eachvariable annuity and variable life product sponsored by Jackson is subject to SEC registration andregulation pursuant to the Securities Act and the Investment Company Act, and applicable stateinsurance and securities laws. Each variable annuity and variable life product are organized as separateaccounts that are unit investment trusts.

Curian Capital, LLC is registered with the SEC pursuant to the Investment Advisors Act and is alsoregistered or notice filed in all applicable states.

Curian Clearing, LLC is registered as a broker-dealer with the SEC pursuant to the SecuritiesExchange Act, and is registered as a broker-dealer in all applicable states. In addition, Curian

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Clearing, LLC is a member firm of the Financial Industry Regulatory Authority (the ‘‘FINRA’’) which wasfounded in 2007 following the merger of the NASD with the self-regulatory functions of the New YorkStock Exchange (‘‘NYSE’’).

Jackson National Life Distributors, LLC is registered as a broker-dealer with the SEC pursuant to theSecurities Exchange Act, and is registered as a broker-dealer in all applicable states. In addition, JacksonNational Life Distributors, LLC is a member firm of the FINRA.

National Planning Holdings, Inc. (‘‘NPH’’) owns four retail broker dealers, being SIIInvestments, Inc., National Planning Corporation, Investment Centers of America, Inc., and IFCHoldings, Inc. (which does business under the name INVEST Financial Corporation). These entities areregistered as broker-dealers, investment advisers, and insurance agencies (or affiliated with insuranceagencies), and are licensed and qualified to transact business pursuant to their respective registrationand/or membership with the SEC, the FINRA, the Municipal Securities Rulemaking Board, applicablestate securities and insurance authorities, and all other applicable jurisdictional authorities.

Prudential also conducts US investment management activities through PPM America, Inc., which isregistered with the SEC as an investment adviser or sub-advisor under the Investment Advisers Act.PPM America, Inc. serves as the investment adviser to Jackson and other US, UK and Asian entitiesaffiliated with Prudential, other institutional clients such as CDOs or similar structured vehicles andprivate investment funds (in which PPM affiliates such as Prudential UK entities and Jackson areinvestors), US mutual funds and other foreign pooled investment vehicles primarily sponsored byaffiliated entities, UK based unit trusts or OEICs, a SICAV and similar vehicles sponsored by affiliates, amodel manager program sponsored by an affiliated entity, unaffiliated US and foreign institutionalaccounts, as well as a limited number of trusts of individuals and their family members. Currently, alimited number of PPM America, Inc.’s clients are unaffiliated or have underlying investors who areunaffiliated institutions, trusts or individuals. The US mutual funds for which PPM America, Inc. servesas investment adviser or sub-adviser are subject to regulation under the Securities Act and theInvestment Company Act, and other similar vehicles organized outside of the US may be subject toregulation under applicable local law.

PPM America, Inc. and certain of its subsidiaries are subject to various levels of regulation underthe federal securities laws that the SEC administers as well as state securities laws. In connection withproviding investment advisory services to certain of its clients, PPM America, Inc. may also be subject toregulation under applicable foreign laws.

To the extent that PPM America, Inc. manages assets of employee benefit plans subject to theEmployee Retirement Income Security Act of 1974 (‘‘ERISA’’), or the Internal Revenue Code, it may besubject to certain restrictions imposed by ERISA and taxes imposed by the Internal Revenue Code. Suchrestrictions are summarized in ‘‘—Employee Benefit Plan Compliance’’ in this section below. The USDepartment of Labor (‘‘Department of Labor’’) and the US Internal Revenue Service have interpretiveand enforcement authority over the applicable provisions of ERISA and the Internal Revenue Code.

Employee Benefit Plan Compliance

Jackson issues certain types of general account stable value products, such as GICs and fundingagreements, to employee benefit plans and to investment vehicles that pool the investments of suchplans. Many of these plans are retirement plans that are subject to the fiduciary standards of ERISA andthat are tax-qualified under the Internal Revenue Code. As such, Jackson may be subject to certainrestrictions imposed by ERISA and taxes imposed by the Internal Revenue Code. These restrictionsinclude:

• the requirement under ERISA that fiduciaries must perform their duties solely in the interests ofERISA plan participants and beneficiaries,

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• the requirements under ERISA that fiduciaries may not engage in ‘‘conflict of interest’’transactions, and

• the requirements under ERISA that a fiduciary may not cause a covered plan to engage in certain‘‘prohibited transactions’’ with certain persons who provide services to the plan or are affiliatedwith the plan sponsor or a plan service provider.

In general, the Internal Revenue Code imposes taxes on persons involved in certain of thetransactions described above.

The Department of Labor and the Internal Revenue Service have interpretive and enforcementauthority over the applicable provisions of ERISA and the Internal Revenue Code.

In the instance where an insurer issues a guaranteed benefit policy to a plan, ERISA provides thatthe insurer need not become a fiduciary with respect to the plan solely as a result of the issuance of thepolicy. Under Section 401 of ERISA, a guaranteed benefit policy means an insurance policy to the extentsuch policy provides for benefits the amount of which the insurer guarantees.

In 1993, in John Hancock Mutual Life Insurance Company v. Harris Trust & Savings Bank, the USSupreme Court held that a portion of the funds held under a certain type of general account annuitycontract did not constitute a ‘‘guaranteed benefit policy’’ within the meaning of ERISA, a holding whichpotentially exposes insurers with similar types of contracts to the application of ERISA’s fiduciary andprohibited transaction provisions in connection with the management of assets in their general accounts.

Although no assurances can be given, Jackson believes that none of its contracts are of the type towhich the holding in Harris Trust would be applicable. Moreover, the Department of Labor has issuedPTE 95-60, which generally exempts external, unaffiliated investment transactions from ERISA’sprohibited transaction provisions. If the Harris Trust holding is applied to its contracts, Jackson would besubject to ERISA’s fiduciary and prohibited transaction provisions described above.

Financial Services Regulatory and Legislative Issues

Proposals to change the laws and regulations governing the financial services industry are frequentlyintroduced in the US Congress, in the state legislatures and before the various regulatory agencies. Thelikelihood and timing of any proposals or legislation and the impact they might have on Jackson and itssubsidiaries cannot be determined at this time.

State legislatures and/or state insurance regulatory authorities frequently enact laws and/orregulations that significantly affect insurers supervised by such authorities. Although the US federalgovernment does not directly regulate the insurance business, federal initiatives may also have an impacton the insurance industry.

The US President has in the past proposed to increase the taxes levied against the insuranceindustry to increase the federal budget revenues. The industry has been very successful in resistingthese proposals on the grounds that an increase in taxes on insurance companies or insurance policieswould have a negative affect on US citizens saving for their retirement. The insurance industry is veryvigilant in monitoring these proposals and taking action to oppose them, as well as to support proposalsthat would provide more favorable tax treatment for certain annuity products.

In 2007 legislation was signed into law that will increase the state tax assessed on insurancecompany premiums. The rate that life insurance companies pay on their premiums under the new law is1.25%, up from 1.0735%. To offset some of the net increase, the legislature included a credit againstcompensation paid to workers in Michigan. Annuity premiums were unaffected by the change in law.

A coalition of national insurance and banking organizations has supported the introduction of USfederal legislation that would allow insurance companies to obtain a federal charter as a regulatoryalternative to a state charter. A coalition of insurers has been formed that is opposed to the so-called

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optional federal charter. Prudential cannot predict whether any federal (or state) legislative initiative tochange the nature or scope of the regulation of the insurance industry will be enacted into law.

Federal and state regulators have focused on the mutual fund and variable annuity and insuranceproduct industries including the broker-dealer system. As a result of publicity relating to widespreadperceptions of industry abuses, including fraudulent and anticompetitive practices among insurancebrokers and mutual funds, there have been numerous regulatory inquiries and proposals for legislativeand regulatory reforms. It is difficult to predict at this time whether changes resulting from industryinvestigations and/or new laws and regulations will affect Prudential’s insurance or investmentmanagement businesses, and, if so, to what degree.

Asian Supervision and Regulation

Regulation of Insurance Business

Prudential’s businesses in Asia are subject to all relevant local regulatory and supervisory schemes.These laws and regulations vary from country to country, but the regulators typically grant (or revoke)licenses and therefore control the ability to operate a business.

The industry regulations are usually widely drawn and will include provisions governing bothfinancial matters and the way business is conducted in general. Examples include the registration ofagents, the approval of products, asset allocation, minimum capital and the basis for calculating thecompany’s solvency and reserves and the valuation of policyholder liabilities. Regulatory authorities mayalso regulate affiliations with other financial institutions, shareholder structures and the injection ofcapital and payment of dividends. Financial statements and other returns are filed with the regulators.The regulators may also conduct physical inspections of the operations from time to time.

A number of jurisdictions across Asia require insurance companies to participate in policyholderprotection schemes (i.e., contribute to a fund to support policyholders in the event of an insurancecompany failing).

To date Prudential Corporation Asia has had no regulatory issues giving rise to a material impact onits results.

For Prudential Corporation Asia’s more significant insurance operations the details of the regulatoryregimes are as follows:

Hong Kong

The Insurance Companies Ordinance (‘‘ICO’’) empowers a Commissioner of Insurance to establish anoffice for the administration of the industry including approvals for a company to conduct insurancebusiness. The Office of the Commissioner of Insurance (‘‘OCI’’) acts as the supervisory arm.

The Hong Kong branch of The Prudential Assurance Company Ltd is authorized to carry on bothlong-term business and general business under a composite license. The branch is also regulated by theHong Kong Securities and Futures Commission (‘‘SFC’’) for its operations of Investment Linked products.

Currently, the government is researching into the possibility of making the OCI an independentgoverning body.

Japan

The Financial Services Agency of Japan (‘‘JFSA’’) regulates insurance companies and other financialinstitutions. The Insurance Business Division of the JFSA specifically undertakes the supervision ofinsurance companies. The fundamental principles of insurance regulation are set out in the InsuranceBusiness Law. PCA Life Japan is licensed by and registered with the JFSA as a life insurance company.

After many false starts, the government finally lifted all restrictions on insurance product sales bybanks in Dec 2007. The biggest impact is expected to be in the health/medical insurance market—about

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a quarter of the overall individual insurance market—which had previously been closed to sales bybanks. PCA Life Japan sees this change as very positive and a potentially large opportunity.

For the first time in a century, insurance laws under the Commercial Code of Japan are underdeliberation as a response to the increasingly diverse needs of today’s society. A revised bill is expectedto be submitted to the ordinary session of the Diet in 2008. Recent deregulatory measures in theInsurance Business Law and the privatization programme of the Japan Post group companies, whichincludes a huge life insurance company, have been spurs to competition in the Japanese insuranceindustry.

Korea

The Ministry of Finance and Economy of Korea set the insurance law after consultation with theFinancial Supervisory Commission (‘‘FSC’’). The FSC’s responsibilities include regulation of the insuranceindustry but it delegates to the Financial Supervisory Services (‘‘FSS’’) work such as supervision,examination and direct contact with insurance companies. The detailed rules under the supervisoryregulation are prepared by FSS. PCA Life Korea is licensed by and registered with the FSC as a lifeinsurance company. Currently, the country does not permit a company to operate both life and non-lifeinsurance at the same time.

The Republic of Korea operates a civil law system, with the FSC prescribing many detailedregulations for insurers to comply. In the past, the FSC has also been very interventionist in setting andenforcing rules on the insurance industry. However, the style of regulation has been gradually changingalong with the trend of liberalization of financial services. This is most pronounced with the regulatorfocusing on the deregulation in asset management and product design activities. Furthermore, the FSS issetting an aggressive insurance supervisory agenda that would strengthen supervision while promotingderegulation. The regulator is moving towards risk-based supervision focusing on various risks ofinsurers’ operations. As part of the shift to risk-based supervision, the FSS is building up the RiskAssessment and Application System (‘‘RAAS’’) to assess insurers’ risks as well as to support thedevelopment of the Risk-Based Capital solvency requirement.

Both the Insurance Law and Insurance Regulations are silent on the entity’s responsibilities for thesuitability of products. There is no explicit requirement for an insurer to consider the suitability of theproduct for the potential customer. Nevertheless, the FSS does operate a Consultation Team and aDispute Settlement Office in the Customer Protection Centre to resolve and prevent customercomplaints and disputes relating to insurance companies.

Korea currently allows many different forms of channels for distributing life insurance productsincluding brokers, agents, telemarketing, direct mailing, bancassurance and mass media television selling.After allowing insurers to sell savings-type insurance policies, such as annuities, through banks in August2003, the government planned to allow banks to sell a wider array of policies beginning in April 2008.However, following strong opposition from insurers, the government has suspended the implementationof this plan. Consequently there is now a difference of opinion in South Korea between insurers andbanks over the expansion of bancassurance.

The Financial Supervisory Commission was renamed the Financial Services Commission in 2008 inan effort to reform the FSC with the objective of enhancing efficiency and making it more responsive.As part of the change, some of the finance ministry’s policy-making powers were transferred to the newFSC. A new Chairman of the Commission, Jun Kwang-woo, was also chosen to head the regulator.Immediately after taking office, Jun told the industry that a wide range of de-regulation initiatives werebeing considered. His comment was consistent with the newly elected President Lee on his plan toreduce the number of business-related rules and regulations in an effort to attract greater inflow offoreign investment.

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Taiwan

The Financial Supervisory Commission (‘‘FSC’’) is responsible for regulating the entire financialservices sector. The FSC’s responsibilities include supervision, examination and investigation. TheInsurance Bureau (‘‘IB’’) of the FSC is responsible for the insurance sector. Currently, a compositelicenses to sell both life and non-life insurance are not granted and PCA Life Taiwan is licensed for lifeinsurance business only.

Taiwanese laws are based on a civil code model and each competent authority is given powers todevelop and issue regulation on specific topics or issues. Many of the current insurance regulations wererevised in 2001 when the new risk-based requirement was introduced. Similar to many Asian countries,the provisions of insurance regulations tend to be prescriptive.

In 2005, FSC introduced new regulations related to internal control and risk management. Theregulation assigned to the Board of Directors the ultimate responsibility for internal control systems andinsurers were required to maintain and satisfy specific documentation and reporting requirements relatedto the area.

FSC promulgated the guidance notes related to foreign currency denominated traditional lifebusiness. Insurers must satisfy several requirements related to disciplinary performance, risk-basedcapital, risk management controls, and complaints efficiency in order to qualify. At this stage, only lifeinsurance and annuity products denominated in US dollars are permitted. Prior approval from theCentral Bank and IB will be required and the underlying foreign portfolio is also subject to the 45%foreign investment limit as per the Insurance Act.

Generally, the Insurance Law and Regulations focus mainly on administrative supervision ofinsurance operations rather than conduct of business. An exception is the regulations introduced in 2004for investment-linked insurance, where specific requirements such as the obligation by insurers todisclose to prospective customer the costs of the product and the risks involved were introduced. Inaddition, a new proposal is currently being drafted by a working group of the Life Insurance Association(‘‘LIA’’). It is a proposal related to the ‘‘Self-Discipline Regulations on Sales of Investment Type Products(‘‘ITP’’). The proposal will require insurers to set up ‘‘Know Your Customers’’ operating principles and toperform needs analysis in identifying risk appetite and financial objectives of policy applicants. Otherrequirements would include establishing risk classes for structured notes products, sample testing ofnew business to determine appropriateness of sales process and policy suitability, and conductingregular inspection to avoid the use of inappropriate sale materials.

China

The body responsible for regulation of the insurance sector is the China Insurance RegulatoryCommission (‘‘CIRC’’) established in 1998. CIRC reports directly to the State Council. The main laws andregulations that govern the CITIC-Prudential joint venture in China are the Insurance Law of the People’sRepublic of China (enacted in 1995) and the Regulation on the Administration of Foreign-fundedInsurance Companies (enacted in 2001).

CIRC is authorized to conduct administration, supervision and regulation of the Chinese insurancemarket, and to ensure that the insurance industry operates in a stable manner in compliance with thelaw. It drafts relevant laws and regulations regarding insurance supervision, examines and approves theestablishment of insurance companies and their branches and supervises market conduct. CIRC has localoffices in all the provinces and selected direct administrative cities and regions across the country. Oneof the key responsibilities of the local offices is to set and administer implementation rules andguidelines in the application of the laws and regulations introduced by CIRC. The local offices will alsoregulate many aspects of the insurance companies’ activities within the locations for which they areresponsible, including but not limited to business, sales and agent conducts, sales licensing practices,approving new sales offices and assessing minor administrative penalties.

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CIRC has focused specific attention on the area of risk prevention. Accordingly, it has identified fivelines of defense against risks, namely internal management and control systems, supervision of solvencyadequacy, on-site inspection, fund management regulation and insurance security fund. These areexpected to form the basis of an ongoing programme of regulatory development.

During 2006 and 2007, CIRC introduced additional rules and guidelines in an effort to strengthenthe areas of internal management and control systems, as well as corporate governance related matters.New requirements include the filing of an annual internal control report, setting up of risk managementand compliance functions, and the need to qualify and obtain approval for the appointment of Directorsand selected management personnel.

China promulgated a new Anti-Money Laundering (‘‘AML’’) Law applicable to all financialinstitutions in November 2006. The People’s Bank of China (‘‘PBOC’’) was entrusted with theresponsibility and authority for regulating all AML activities in China. PBOC also introduced severaladditional AML measures between Nov 06 to Jun 07 to provide specific rules and guidelines in theapplication of the AML Law. The areas covered would include customer identification, reporting of largevolume and other suspicious transactions, record keeping and reporting of suspicious transactionsinvolving terrorism financing.

India

Insurance is subject to federal regulation in India. The primary legislation is the Insurance Act, 1938,and the Insurance Regulatory & Development Authority Act, 1999. The Insurance Regulatory &Development Authority (‘‘IRDA’’) is the key regulator for Prudential Indian JV, ICICI Prudential LifeAssurance.

The IRDA’s duties include issue of certificates of registration to insurance companies, and it has amandate to protect the interests of the policy holders. Regulatory direction is currently focusing onconsumer disclosure and sales practices. A number of regulations also encourage the sale of insuranceto customers in rural parts of India.

Singapore

The Monetary Authority of Singapore (‘‘MAS’’) is responsible for insurance company regulation andsupervision. In order to sell insurance in Singapore, companies need to be licensed by the MAS.Prudential Assurance Company Singapore is registered and licensed to manufacture and sell both lifeand general insurance business.

The MAS also has responsibility for supervising compliance with anti-money laundering (‘‘AML’’)provisions, though suspicious transactions must be notified to the Commercial Affairs Department, anenforcement agency of the Singapore Police Force. In 2007, new regulations were introduced to furtherstrengthen the AML requirements.

Another relevant regulatory authority for the business is the Central Provident Fund (‘‘CPF’’) Board.The CPF is a social security savings scheme jointly supported by employees, employers and theGovernment. CPF members are employees and self-employed persons in Singapore with the CPF Boardacting as the trustee. The CPF Board regulates the life insurers in the operation of various CPF schemesincluding the CPF Investment Scheme where CPF monies are used by policyholders to purchaseinsurance policies such as annuities and investment-linked policies.

The MAS is empowered under the Insurance Act to make regulations for the sector and it alsoissues Notices, Circulars and Guidelines. In practice, MAS and CPF Board have very detailed legislationframeworks to govern the insurance companies and the distribution of insurance products in Singapore.Despite the detailed requirements, an examination of the Notices suggests MAS in many respects do infact focus on outcomes rather than processes.

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The RBC framework was introduced in recent years to better reflect the relevant risks being facedby insurance companies. The framework introduces changes in the valuation methodology for assets andliabilities, fine-tunes the operations of life insurance funds, establishes new capital requirement rules,updates the role of actuaries, and introduces a new set of statutory reporting standards. An insurer hasto notify the MAS when it has failed or is likely to fail to comply with the mandated RBC indicators orwhen a financial resources warning event has occurred or is likely to occur.

MAS have also issued Notices that covers the market conduct standards for life insurers includingsuch areas as appointing and training Representatives, maximum tier in agency structure, loans andadvances, disciplinary action, disclosure, sales process and replacement of life polices. In addition, theMAS have recently published a consultation paper entitled ‘‘Guidelines on Fair Dealing—Board andSenior Management Responsibility for delivering Fair Dealing Outcomes to Consumers’’. The proposedapproach is similar to that of the UK FSA Treating Customers Fairly (TCF) Principle.

Malaysia

In Malaysia, Bank Negara (‘‘BN’’) is the regulatory body responsible for supervising and regulatingthe conduct of financial services including insurance business. All insurance companies must be licensedwith the Ministry of Finance. In addition, they are required to be a member of the Life InsuranceAssociation of Malaysia and/or Persatuan Insurans Am Malaysia (for general insurers). PrudentialAssurance Malaysia Berhad has a license for both life and general insurance business.

Although BN is committed to migration towards a ‘‘disclosure-based’’ regime, there are still‘‘prescriptive’’ requirements from the past which remain. For example, pre-approval from the bank isrequired for some actions which in the UK are matters for management decision. These include suchmatters as opening new branches, entering into outsourcing contracts, and introducing new annuitycertain and investment-linked products.

With the objective of promoting greater transparency in the sale of insurance products, BN hasissued guidelines on the minimum disclosure requirements to be observed by insurers and theirintermediaries in their interaction with prospective policy owners. The guidelines specify the minimuminformation that must be disclosed to a prospective policy owner at the point of sale to enable them tomake informed decisions, which includes, details of types of cover offered, benefits, restrictions, andexclusions of the policy as well as any significant conditions, warranties and obligations which the policyowner must meet.

BN has formulated a framework on proper advice practices for life insurance business to ensure thatintermediaries make greater effort to effectively evaluate the insurance requirements of consumers. Theguidelines under the framework set the minimum standards for proper advice as well as structuredprocess for selling life insurance products. They also require the intermediaries to obtain sufficientinformation on prospective policy owners before rendering appropriate advice on the suitability of aparticular insurance product.

In an effort to further reform the regulation on insurers and better reflect the risks being faced byeach entity, the risk-based capital framework is to be implemented by no later than January 1, 2009.

Indonesia

The insurance industry is regulated by the Insurance Bureau of the Ministry of Finance. PrudentialLife Assurance is duly authorized for insurance business.

The local Life Insurance Association (‘‘AAJI’’) acts as a conduit between insurers and the MOF interms of the development of new regulations.

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Takaful

In addition to gaining the first overseas insurer’s Takaful License in Malaysia (a Prudential jointventure with Bank Simpanan Nasional known as Prudential BSN Takaful Berhad), Prudential is alsolaunching a Takaful insurance business in Saudi Arabia later this year. Sheriah compliant products arenow also being sold in Indonesia.

Others

Prudential also have life insurance operations in the Philippines—Pru Life Insurance Corporation ofUK regulated by the Insurance Commission; Vietnam—Prudential Vietnam Assurance Private Limitedregulated by the Ministry of Finance; Thailand—Prudential Life Assurance (Thailand) Public CompanyLimited regulated by the Office of Insurance Commissioner. In late 2007 Prudential also opened aseparate consumer finance business in Vietnam authorized by the State Bank of Vietnam.

Regulation of Funds Business

Prudential conducts its fund business through subsidiaries or joint ventures in the followingcountries in Asia: The People’s Republic of China, Dubai (Dubai International Financial Centre), HongKong Special Administrative Region, Republic of India, Japan, Republic of Korea, Malaysia, Republic ofSingapore, Taiwan, Republic of China and Socialist Republic of Vietnam. All operations are authorizedand licensed by the relevant authorities.

Hong Kong

Prudential Asset Management (Hong Kong) Limited (‘‘PAMHK’’), incorporated in Hong Kong, is anultimately wholly owned subsidiary of Prudential plc. PAMHK is licensed with the Hong Kong Securitiesand Futures Commission (‘‘HKSFC’’), a Hong Kong regulator and is authorized to carry out Type 1(Dealing in Securities), Type 4 (Advising on Securities) and Type 9 (Asset Management) regulatedactivities in Hong Kong.

BOCI-Prudential Asset Management Limited (‘‘BOCIP’’), incorporated in Hong Kong, is a jointventure between Prudential and BOCI Asset Management Limited. BOCIP is licensed with the HKSFC,and is authorized to carry out Type 1, Type 4, Type 5 (Advising on Futures Contracts), Type 6 (Advisingon Corporate Finance) and Type 9 regulated activities in Hong Kong. BOCIP offers a comprehensiverange of investment products, including Hong Kong Mandatory Provident Fund (‘‘MPF’’) scheme,pension funds, retail unit trusts, institutional mandates and other advisory funds. It also offers privateinvestors and institutional clients investment portfolios and charity fund management services. As one ofthe pioneers in the asset management industry in Hong Kong, BOCIP launched a series of capitalguaranteed funds linked to various underlying indices or basket of stocks with varying currencies andmaturities.

Securities and Futures Ordinance (‘‘SFO’’) and other subsidiary legislations are the laws in HongKong relating to financial services which govern the fund management companies. HKSFC is thestatutory body responsible for the administration of this Ordinance and these related subsidiarylegislations and rules.

Recent regulatory trends

On January 31, 2008, HKSFC issued a consultation paper to the public on pre-vetting of fundsnotice and advertisements to the retail public. HKSFC is proposing to remove the current pre-approvalrequirement and replace it with a post filing to HKSFC instead. Consultation ended on February 29,2008 and HKSFC will soon publish the consultation results along with its final proposal on this subject.

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Japan

PCA Asset Management Limited (‘‘PCA AM’’) is registered with the Financial Services Agency toprovide Second Financial Instrument business, Investment Management business and InvestmentAdvisor & Agency business.

Under the registration of Second Financial Instrument business, PCA AM extends solicitation toinvestors while maintaining no account specifically due to no direct sales channel to be facilitated uponBusiness and Service Documents revised upon Financial Instruments & Exchange Law (FIEL).

Recent regulatory trends

The new Financial Instruments and Exchange Law (‘‘FIEL’’), effective from September 30, 2007 hasestablished a cross-sectional legislative framework for user protection covering a wide range of financialproducts, enhanced disclosure requirements, and ensuring appropriate management of self-regulatoryoperations by exchanges and strict countermeasures against unfair trading.

The new law requires the description of sales materials to indicate specific risks related to eachproduct in order for any investors to duly understand the feature/risk of our funds and internal rules tobe reviewed.

Korea

Prudential conducts fund business in Korea through an indirect, wholly-owned subsidiary, PCAInvestment Trust Management Co. Ltd (‘‘PCA Investment Trust’’).

The bodies responsible for the regulation of an Asset Management Company (‘‘AMC’’), InvestmentAdvisory Company (‘‘IAC’’) or Discretionary Investment Company (‘‘DIC’’) are the Ministry of Strategyand Finance (‘‘MOSF’’), the Financial Services Commission (‘‘FSC’’) and its executive arm, the FinancialSupervisory Service (‘‘FSS’’).

Traditionally, the FSC in Korea operates in a prescriptive way, with a significant amount of detailedregulation that AMCs must comply with. In recent years, the style of regulation of the indirectinvestment industry has been changing in line with the trend towards liberalization of financial services.In particular, the regulator is focusing on deregulation in asset management and product design activitiesand shifting towards a principles-based regulatory regime.

Recent regulatory trends

The proposed Capital Market Consolidation Act is expected to be effective from February 2009.Under the proposed law, there is allowance for operations to expand into other business activitiescreating further opportunities and competition within the asset management industry. To ensure faircompetition, the same level of regulations would apply to the same business category.

It is also proposed that stricter internal control measures be required for conducting multiplebusinesses to avoid conflicts of interests and that heightened investor protection measures such asstricter liability for mis-selling and tighter disclosure requirements be introduced.

Taiwan

The body responsible for regulation of the Securities Investment Trust Enterprise (‘‘SITE’’), SecuritiesInvestment Consulting Enterprise (‘‘SICE’’), and Discretionary investment business is the Securities andFutures Bureau (‘‘SFB’’) under the Financial Supervisory Commission (‘‘FSC’’).

PCA Securities Investment Trust Co., Ltd is registered as a SITE with the FSC. It is compulsory thatall SITEs are memberships of the self-regulatory organization (‘‘SRO’’) in Taiwan—Securities Investment

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Trust and Consulting Association (‘‘SITCA’’). SITE and SICE may not commence business without beingadmitted to membership in the Association.

SFB is the first line of supervisory body responsible for declaration of laws, regulations and policies.The missions of the SRO are to support the regulatory and administrative operations entrusted by theSFB, including adopting self-regulatory rules and overseeing self-regulation by its members, establishingmembership disciplinary framework, and carrying out matters that SFB has authorized it to handle suchas previewing product filing document before submission for SFB’s final review. The SRO also acts asliaison between the SFB and its members for matters of business development.

China

CITIC-Prudential Fund Management Company Limited, a joint venture between Prudential and CITICGroup (China International Trust and Investment Corporation), is regulated by the China SecuritiesRegulatory Commission (‘‘CSRC’’). The CSRC supervises the establishment of fund managementcompanies (‘‘FMCs’’) and the launch of securities investment funds.

The legislative framework of China’s fund industry comprises the China Securities Investment FundsLaw (the ‘‘Fund Law’’) and a set of ancillary regulations (the ‘‘Fund Regulations’’). While the Fund Lawand Fund Regulations spell out the rules and requirements which must be adhered to by all FMCs, thesupervisory approach of CSRC, to a certain extent, is also principles-based. The Chinese authorities aimto protect the legitimate rights and interests of the investors and other relevant parties, and thereby topromote the healthy development of securities investment funds and securities markets.

Recent regulatory trends

In late 2007, the CSRC has imposed a new requirement that all fund distributors are requested tohave fund suitability policies and procedures. The CSRC has also issued a Fund Distributor InternalControl Guidelines, by which all fund distributors are requested to implement internal controls andprocess in accordance with the Guidelines

The CSRC also implemented a new regulation in January 2008 where fund management companiesthat meet the CSRC qualification requirements may apply for a license to provide discretionary assetmanagement services to their clients.

India

ICICI Prudential Asset Management Company Limited, a joint venture between Prudential and ICICIBank, is approved by Securities and Exchange Board of India (‘‘SEBI’’) under SEBI (Mutual Funds)Regulations, 1996 to act as Investment Manager of ICICI Prudential Mutual Fund (the ‘‘Fund’’). The Fundwas set up as a Trust sponsored by Prudential plc (through its wholly owned subsidiary namelyPrudential Corporation Holdings Ltd) and ICICI Bank Ltd. ICICI Prudential Trust Limited (the ‘‘TrustCompany’’), a company incorporated under the Companies Act, 1956, is the Trustee to the Fund.

Mutual funds in India are regulated by the SEBI (Mutual Funds) Regulations, 1996, and circulars /guidelines issued under these regulations, the Indian Trusts Act, 1882 and relevant provisions of theCompanies Act, 1956.

As specified by the Indian Trusts Act, 1882 and reiterated by the SEBI regulations, all mutual fundsare required to be in the form of trusts. The trustee functions are carried out by separately establishedtrust companies or boards of trustees. In all cases, the trust deed must be approved by SEBI.

ICICI Prudential Asset Management Company Limited has obtained registration from SEBI to act asa Portfolio Manager under SEBI (Portfolio Managers) Regulations, 1993.

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Recent regulatory trends

SEBI has prescribed that no entry load shall be charged for direct applications received by any AMCwith effect from January 4, 2008. Direct applications are applications received through the internet orsubmitted to an AMC, collection centre, or Investor Service Centre that are not routed through anydistributor, agent or broker, for the fresh investments or additional purchases under the same folio orswitch-in to a scheme from other schemes.

SEBI removed the provision regarding the charging of initial issue expenses and amortization byclosed ended schemes. All mutual fund schemes are required to meet the sales, marketing and othersuch expenses connected with sales and distribution of schemes from the entry load. This newrequirement is applicable to all mutual fund schemes launched after January 31, 2008.

With effect from February 1, 2008, SEBI has made it mandatory for any investors investing IndianRupees 50,000/- and above in mutual funds to comply with Know Your Client (‘‘KYC’’) requirementsunder the Prevention of Money Laundering Act 2002.

Singapore

Prudential Asset Management (Singapore) Limited (‘‘PAMS’’), an indirect wholly owned subsidiary ofPrudential plc, holds a Capital Markets Services (‘‘CMS’’) licence, with respect to the regulated acivitiesof fund management and dealing in securities as regulated activities, issued by the Monetary Authorityof Singapore (‘‘MAS’’) under the Securities and Futures Act. The MAS’ supervisory approach hasevolved over the years and is now more risk-focused and disclosure-based than it was previously.

PAMS is also registered with the Central Provident Fund (‘‘CPF’’) Board, Singapore, to offer unittrusts included under the CPF Investment Scheme (‘‘CPFIS’’). In addition, PAMS is registered with theU.S. Securities & Exchange Commission under the Investment Advisers Act, the Financial SupervisoryCommission (‘‘FSC’’), Korea and the Securities and Exchange Board of India (‘‘SEBI’’) under the SEBI(Foreign Institutional Investors) Regulations, 1995.

Recent regulatory trends

In conjunction with the registration of funds under the CPFIS, all funds are required to comply witha 3% sale charge cap and a the median expense ratio cap by July 1, 2007 and January 1, 2008,respectively.

Malaysia

Prudential Fund Management Berhad (‘‘PFMB’’) is part of Prudential plc (United Kingdom). PFMBwas incorporated in November 2000 and is a wholly owned subsidiary of a Malaysian resident holdingcompany, which is in turn a subsidiary of the Prudential group of companies.

PFMB is regulated by the Securities Commission, which supervises the establishment of unit trustfunds and asset management products.

The Securities Commission’s Guidelines on Unit Trust Funds stipulates the rules and requirements tobe adhered by any person intending to establish a unit trust fund in Malaysia and issue, offer or inviteany person to subscribe or purchase units of the unit trust fund. Whilst the rules are principles based,the Securities Commission encourages a disclosure based regime. This provides a healthy environment inpromoting unit trust funds and capital markets.

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Dubai

Prudential Asset Management Limited (‘‘PAMD’’) was incorporated in the Dubai InternationalFinancial Centre (‘‘DIFC’’) in September 2006. PAMD is an indirect wholly owned subsidiary ofPrudential plc.

PAMD is regulated by the Dubai Financial Services Authority (‘‘DFSA’’), which is the independentregulator for the DIFC. PAMD holds a licence for Dealing in Investments as Agent, Managing Assets,Arranging Credit or Deals in Investments, Advising on Financial Products or Credit, Arranging Custody,Operating a Collective Investment Fund, Providing Fund Administration and Operating an IslamicWindow.

The supervisory approach of DFSA, is to a large extent, risk based.

Recent regulatory trends

The DFSA published Consultation Paper No. 52 on December 4, 2007 outlining its proposals todevelop its regulatory regime in three key areas: client classification and access; the regime forCollective Investment Funds; and convergence with international regulatory developments. TheConsultation Paper sets out proposals for extensive changes to enable the financial services market ofthe DIFC to progress into its next stage of development. The proposals are expected to be finalized bythe second quarter of 2008.

Vietnam

Prudential Vietnam Fund Management Private Limited Company (‘‘PVN FMC’’) was established andcurrently operates under the Business Registration Certificate No. 410400113 issued by the Departmentof Planning and Investment of Ho Chi Minh City on May 24, 2005 and the LicenseNo. 03/UBCK-GPHDQLQ dated May 26, 2005 and Decision No. 459/QD-UBCK dated August 13, 2007by the State Securities Commission of Vietnam (SSC) for operation in securities investment fundmanagement and securities portfolio management.

Prudential Vietnam Life Insurance Company is the sole owner of PVN FMC.

PVN FMC is regulated by the State Securities Commission of Vietnam (‘‘SSC’’), which is overseenby Ministry of Finance (‘‘MOF’’). Given the mandate to establish and develop the securities markets, theSSC supervises the organization, and operation of securities investment funds and fund managementcompanies.

Recent regulatory trends

PVN FMC is subject to the Securities Law, which came into effect in early 2007. The Securities Lawcontemplates two types of domestic securities trading market: The Securities trading center and StockExchange.

On January 17, 2007, the Government issued Decree 14 implementing the Securities Law governingpublic offerings, listings and the regulation of securities companies, fund management companies andsecurities investment companies.

The MOF has also issued a number of other regulations to implement the Securities Law andDecree 14, including Decision 35 on the organization and management of fund management companies;Decision 45 on the establishment and management of securities investment funds; and Circular 38 onpublishing information on the securities market.

Item 4A. Unresolved staff comments

None

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Item 5. Operating and Financial Review and Prospects

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

The following discussion and analysis should be read in conjunction with Prudential’s consolidatedfinancial statements and the related notes to Prudential’s consolidated financial statements includedelsewhere in this document. Prudential’s consolidated financial statements have been prepared inaccordance with IFRS. A summary of the critical accounting policies which have been applied to thesestatements is set forth in the section below entitled ‘‘—Factors Affecting Results of Operations—IFRSCritical Accounting Policies’’.

The results discussed below are not necessarily indicative of the results to be expected in anyfuture periods. This discussion contains forward-looking statements based on current expectations, whichinvolve risks and uncertainties. Actual results and the timing of certain events may differ significantlyfrom those projected in these forward-looking statements due to a number of factors, including thoseset forth in the section below entitled ‘‘—Factors Affecting Results of Operations’’, in Item 3, ‘‘KeyInformation—Risk Factors’’ and elsewhere in this document.

Introduction

Prudential is an international retail financial services group with significant operations in Asia, theUS and the UK. Prudential’s aim is to promote the financial well-being of its customers and theirfamilies, with a particular focus on saving for retirement and security in retirement.

Prudential is structured around four main business units; Prudential Corporation Asia, Jackson,Prudential UK insurance operations and M&G. These are supported by central functions which areresponsible for leading Group strategy, cash and capital management, leadership development andsuccession, reputation management, and other core Group functions.

Prudential Corporation Asia is the leading European-based life insurer in Asia in terms of marketcoverage and the number of top five market positions. The Company has life insurance and assetmanagement operations in 13 markets covering China, Hong Kong, India, Indonesia, Japan, Korea,Malaysia, the Philippines, Singapore, Taiwan, Thailand, Vietnam and the United Arab Emirates.

Jackson provides retirement savings and income solutions in the mass and mass-affluent segmentsof the US market, primarily to retirees and those nearing retirement.

Prudential UK insurance operations is a leading provider of retirement savings and income solutionsand life assurance in the UK and believes it has a unique combination of competitive advantagesincluding its significant longevity experience, multi-asset management capabilities and its brand andfinancial strength. Prudential provides a range of financial products and services including annuities,corporate pensions, with-profits and unit-linked bonds, savings and investment products, protection,equity release and health insurance products.

M&G is Prudential’s UK and European fund management business and has £167 billion of assetsunder management as at December 31, 2007 of which £116 billion relates to Prudential’s long-termbusiness funds. M&G aims to maximize profitable growth by operating in markets where it has leadingposition and competitive advantage, including retail fund management, institutional fixed income, pooledlife and pension funds, property and private finance.

Factors Affecting Results of Operations

Prudential’s results of operations are affected, to a greater or lesser degree, by a variety of factors,including demographics, general economic and market conditions, government policy and legislation andregulation, as discussed in greater detail below. In addition changes in interest rates and returns from

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equity, real estate and other investments as well as volatility in these items may affect Prudential’sprofitability.

See Item 3, ‘‘Key Information—Risk Factors’’ for more information on risks associated with theseand other factors. In addition, changes to the composition of its businesses and the execution of itsgrowth strategy may result in increased variation in profits from year to year.

General Economic and Market Conditions

Prudential believes that the retail financial services industry is undergoing a transformation as alarge segment of the population transitions out of the workforce and into active retirement. Someestimates suggest that, in the US and the UK alone, some £7 trillion of assets could move into theretirement market over the next five years, and there is also a significant and growing retirementopportunity in Asia.

Not only are these people likely to live longer than previous generations, but their needs aredifferent from their predecessors. In particular, many are looking for a more active lifestyle in retirement,but often underestimate the savings required for this. In addition, there is a move towards greaterself-provision as a result of declining governmental support. The increased cost of long term care is alsoa significant factor, as is the need to protect the value of assets against inflation over longer periods oftime.

Prudential believes that this retirement opportunity will be a significant driver of growth andprofitability over the coming years, and that it has a set of assets and capabilities which position itextremely well to capture a large share of that opportunity in its chosen markets. These include itsbrands, its investment and risk management skills, its product innovation and its powerful distributionnetworks.

Particular features for the Group’s geographic areas of operations are shown below:

Asia

Asian households are changing rapidly; they are becoming wealthier, smaller and older with agrowing need for financial solutions.

Asia remains a very attractive region for growth opportunities due to its high levels of economicactivity translating into higher levels of personal wealth, greater disposable incomes, a comparativelyhigher propensity to save and a growing appetite for good quality protection and savings products.Traditionally older people have relied on their children to provide for them, but Prudential believes thatwithin just one generation this will be far less common. Ageing demographics are also beginning todrive increased household savings rates and an emerging need for healthcare and retirement solutions.

Asian governments have little appetite to increase the provision of state funded retirement benefitsand healthcare and are actively encouraging the development of a strong, dynamic private sector tomeet people’s growing need for financial solutions. The composition of demand and economic activityhas been shifting recently towards being more domestically driven and Prudential expects this trend tocontinue, resulting in less dependence on Western economies. Short term interest rates are expected tocontinue to rise slowly as central banks balance normalizing economic policy with containing pressurefor currencies to appreciate. Long term bond yields are expected to climb from current levels aseconomic activity broadens and domestic inflation rises. Equity investments will be supported bycontinued economic growth and the current valuation levels. Overall, it is expected that these factorswill continue to encourage investors into long term savings products.

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US

The United States is the largest retirement savings market in the world and is expected to continueto grow significantly over the next 10 years as the post-war generation reaches retirement.

The combination of increasing life expectancy and decreasing retirement age in the US is expectedto lead to an increase in the average time individuals will spend in retirement and a shift from assetaccumulation to income distribution in the retirement market. At the same time, the responsibility forproviding income during retirement continues to shift away from institutions, such as government andemployers, toward individuals. As a result, consumers have a growing need for independent financialadvice and increasingly seek guarantees and longevity protections from the financial products theypurchase.

The US life insurance industry remains highly fragmented and competition for market share isintensifying through aggressive pricing. Life insurers find themselves competing with other financialservices providers, particularly mutual fund companies and banks, for a share of retirement savingsassets in the US.

Jackson was predominantly a spread-based business until recently, with the majority of its assetsinvested in fixed income securities. Recently its fee-based business has become more prominent andnow represents a significant part of Jackson’s business mix.

In general, Jackson’s results are heavily affected by fluctuations in economic and market conditions,especially interest rates, credit conditions and equity markets.

The profitability of Jackson’s spread-based business depends in large part on its ability to manageinterest rate spreads, as well as the credit and other risks inherent in its investment portfolio. Prudentialdesigns its US products and manages the investments supporting this business to reduce interest ratesensitivity. This has the effect of moderating the impact on Prudential’s results of changes in prevailinginterest rates.

Changes in interest rates either upward or downward, including changes in the difference betweenthe levels of prevailing short-term and long-term rates, can expose Jackson to the risk of not earninganticipated spreads between the rate earned on investments and the rate credited on its policies. Forexample, if interest rates go up and/or competitors offer higher crediting rates, withdrawals on annuitycontracts may increase as policyholders seek higher investment returns elsewhere. In response, Jacksoncould (1) raise its crediting rates to stem withdrawals, decreasing its spread; (2) sell assets which mayhave depressed values in a high interest rate environment, creating realized investment losses; or (3) payout existing cash which would otherwise have earned interest at the higher interest rates. Moreover, tothe extent that Jackson holds illiquid private placements and commercial mortgages, there is a risk that itwill incur losses if it needs to sell those assets. Conversely, if interest rates decrease, withdrawals fromannuity contracts may decrease relative to original expectations, creating more cash than expected to beinvested at lower rates. Jackson may have the ability to lower the rates it credits to policyholders as aresult, but may be forced to maintain crediting rates for competitive reasons or because there areminimum interest rate guarantees in certain contracts. In either case, the spread earned by Jacksonwould be lowered.

The profitability of Jackson’s fee-based business depends in large part on its ability to manageequity market risk. As the investment return on the separate account assets is attributed directly to thecontract holders, Jackson’s profit arises from the fees charged on the contracts, less the expensesincurred, which include the costs of guarantees. In addition to being a profitable book of business in itsown right, the variable annuity book also provides an opportunity to utilize the offsetting equity riskamong various lines of business to manage Jackson’s equity exposure in a cost-effective fashion. Jacksonbelieves that the internal management of equity risk coupled with the utilization of external derivativeinstruments where necessary, continues to provide a cost effective method of managing equity

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exposure. Profits in the variable annuity book of business will continue to be subject to the impact ofmarket movements both on sales and allocations to the variable accounts and the effects of theeconomic hedging programme. While Jackson hedges its risk on an economic basis, the nature andduration of the hedging instruments, which are recorded at fair value through the income statement, willfluctuate and produce some accounting volatility. Jackson continues to believe that, on a long-termeconomic basis, its equity exposure remains well managed. See Item 11, ‘‘Quantitative and QualitativeDisclosures about Market Risk’’ for a discussion of the management of Prudential’s exposure to suchmarket risk.

UK

With an ageing population and the increasing concentration of wealth, Prudential believes theretirement and near-retirement population will represent the fastest growing segments of the marketover the next 10 years.

Prudential is focusing on the retirement savings and income market in the UK. Over 50 per cent oftotal assets, including pensions, housing equity and liquid assets, are held by those approaching or inretirement. In addition, wealth is concentrated in the mass affluent and high net worth individuals.

Additionally, the responsibility for providing income during retirement is continuing to shift awayfrom the government and employers towards the individual. This coupled with low savings and highindebtedness in the UK, increases the risk that individuals will be inadequately provided for duringincreasingly long periods of retirement. Consequently, there is a growing demand for financial adviceand financial products including guarantees and longevity protection.

In the United Kingdom, where Prudential’s with-profits fund invests in debt and other fixed incomesecurities, equity securities and real estate, shareholders’ profits under IFRS are strongly related to thebonuses it declares. The most important influences on the bonus rates are the overall rate of returnearned on investments and Prudential’s expectation of future investment returns. See ‘‘—Analysis byGeographic Region—United Kingdom—Basis of Profits’’, ‘‘—With-profits Products’’ and ‘‘—Bonus Rates’’below. Prudential’s bonus policy and its impact on profitability are addressed in more detail in ‘‘IFRSCritical Accounting Policies’’ below. In addition, the shareholders’ profits under IFRS are significantlyinfluenced by the contribution from the growing shareholder backed annuity business. The key factorsaffecting the profitability of this business are described in note D2 to the consolidated financialstatements.

Government Policy and Legislation

Changes in government policy or legislation applying to companies in the financial services andinsurance industries in any of the jurisdictions in which Prudential operates, particularly in the UnitedKingdom, the United States and Asia, may adversely affect the result of its operations. These includepossible changes in the tax treatment of financial products and services, government pensionarrangements and policies, the regulation of selling practices and solvency standards. These changesmay affect Prudential’s existing and future business by, for example, causing customers to cancel existingpolicies, requiring Prudential to change its range of products and services, redesign its technology orother systems, retrain staff, pay increased tax or incur other costs.

Regulation

In recent years, the insurance sectors in the markets in which Prudential operates have seenconsiderable regulatory change. Failure to comply with local regulation may result in sanctions, whichcould take the form of a financial penalty.

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Additional regulation, scrutiny and related costs have put pressure on the margins on new business.In the United States, Prudential has been the subject of regulatory sanctions and class actions. Theselegal proceedings are discussed in more detail under Item 4, ‘‘Information on the Company—Business ofPrudential—Legal Proceedings’’. Changes in pension, financial services and tax regulation could have animpact on Prudential’s results. See Item 4, ‘‘Information on the Company—Supervision and Regulation ofPrudential’’ for a summary of the current regulatory environment in which Prudential conducts itsbusiness.

Exchange Rates

Due to the geographical diversity of Prudential’s businesses, it is subject to the risk of exchangerate fluctuations. Prudential’s international operations in the United States, Asia and Europe, whichrepresent a significant proportion of total group income and expenses, generally write policies and investin the same local currency, which although limiting the effect of exchange rate fluctuations on localoperating results, can lead to fluctuations in Prudential’s consolidated financial statements upontranslation of results into pounds sterling.

IFRS Critical Accounting Policies

Prudential’s discussion and analysis of its financial condition and results of operations are basedupon Prudential’s audited consolidated financial statements, prepared in accordance with InternationalFinancial Reporting Standards as issued by the International Accounting Standards Board (collectively‘‘IFRS’’). Were the Group to apply International Financial Reporting Standards as adopted by theEuropean Union as opposed to those issued by the International Accounting Standards Board, noadditional adjustments would be required.

The preparation of these financial statements requires Prudential to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure ofcontingent assets and liabilities. On an on-going basis, Prudential evaluates its estimates, including thoserelated to long-term business provisioning, the fair value of assets and the declaration of bonus rates.Prudential bases its estimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgments anduncertainties, and potentially give rise to materially different results under different assumptions andconditions. Prudential believes that its critical accounting policies are limited to those described below.

The critical accounting policies in respect of the items discussed below are critical for the Group’sresults insofar as they relate to the Group’s shareholder financed business, in particular for Jackson. Thepolicies are not critical in respect of the Group’s with-profits business. Accordingly, explanation isprovided in this section as to why the distinction between with-profits business and shareholder-backedbusiness is relevant.

The items discussed below explain the effect of changes in estimates and the effect of reasonablylikely changes in the key assumptions underlying these estimates as of the latest balance sheet date soas to provide analysis that recognizes the different accounting effects on profit and loss or equity. Inorder to provide relevant analysis that is appropriate to the circumstances applicable to the Group’sbusinesses, the explanations refer to types of business, fund structure, the relationship between assetand policyholder liability measurement, and the differences in the method of accounting permitted underIFRS 4 for accounting for insurance contract assets, policyholder liabilities and unallocated surplus of theGroup’s with-profits funds.

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Investments

Determining the fair value of unquoted investments

The Group holds certain financial investments which are not quoted on active markets. Their fairvalues are determined in full or in part by using valuation techniques. If the market for a financialinvestment of the Group is not active, the Group establishes fair value by using quotations fromindependent third parties, such as brokers or by using valuation techniques. The fair values ofinvestments valued using a valuation technique at December 31, 2007 was £9,854 million (2006:£8,211 million). Of this amount £5,739 million (2006: £4,503 million) is held by with-profits operations,for which value movements do not affect directly shareholder results, and £4,115 million (2006:£3,708 million) is held by shareholder-backed operations. The valuation techniques include the use ofrecent arm’s length transactions, reference to other instruments that are substantially the same,discounted cash flow analysis, option adjusted spread models and, if applicable, enterprise valuation andmay include a number of assumptions relating to variables such as credit risk and interest rates. Changesin assumptions relating to these variables could positively or negatively impact the reported fair value ofthese instruments.

The majority of the financial investments valued using valuation techniques were debt securities.The fair value of debt securities valued using valuation techniques at December 31, 2007 was£6,374 million (2006: £6,200 million), of which debt securities with a fair value of £3,511 million (2006:£3,341 million) were held by UK operations with £3,002 million (2006: £2,945 million) of this amountrelated to securities held by with-profits operations and £509 million (2006: £396 million) related tosecurities held by the shareholder-backed UK annuity subsidiary PRIL. Debt securities valued usingvaluation techniques held by the US operations were £2,863 million (2006: £2,859 million).

These debt securities include private debt securities such as private placements, project finance,asset securitizations and local authority securities. The securities are mainly long-dated and not regularlytraded and are valued internally using market standard practices. The majority of the debt securitiesabove are valued using matrix pricing, which is based on assessing credit quality of the underlyingborrower to derive a suitable discount rate relative to government securities. Under matrix pricing, thedebt securities are priced by taking the credit spreads on comparable quoted public debt securities andapplying them to the equivalent debt instruments factoring a specified liquidity premium. The majority ofthe parameters used in this valuation technique are readily observable in the market and, therefore, arenot subject to interpretation.

For the UK operations, in accordance with the Group’s Risk Management Framework, all internallygenerated calculations are subject to independent assessment by the Group’s Fair Value Committeeswhich comprise members who are independent of the fund managers involved in the day-to-day tradingin these assets.

In addition to private debt securities, debt securities of US operations valued using valuationtechniques also included securities held by the Piedmont trust entity, an 80 per cent Jackson held statictrust formed as a result of a securitization of asset-backed securities in 2003 that are accounted for onan available-for-sale basis. As at December 31, 2007, the fair value of these Piedmont assets valuedusing valuation techniques was £316 million (2006: £405 million). Significant estimates and judgmentsare also employed in valuing certain asset-backed and mortgage-backed securities held by the Piedmonttrust entity. These valuations may impact reported shareholder profit and loss amounts through thedetermination of impairment and recovery amounts.

Whilst management believes that the estimates and assumptions employed in developing the fairvalue estimates are reasonable and present management’s best estimate of such values, a reasonablerange of values exists with respect to most assumptions utilized in determining these values. As a result

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of the potentially significant variability in the estimates of the assumptions used in these models, therange of reasonable estimates of the fair value of these securities is significant.

Management has obtained broker bids on these Piedmont trust assets that represent the value atwhich the Group could sell the investments, if forced. These bids are not based on full knowledge andhence analysis of the investments, but represent the best estimate of the worst case decline in marketvalue of these securities. The broker bids for these securities at December 31, 2007 totaled£260 million, a difference of £56 million (2006: £372 million, a difference of £33 million) to the fairvalue applied.

The equity securities and other investments, which include, property and other partnerships ininvestment pools, venture investments and derivative assets, valued using valuation techniques apply lessreadily observable market factors and more non-observable factors than the matrix pricing technique asused for the majority of the debt securities. In addition to the investments shown above, there are someminor amounts valued using valuation techniques in the Group’s Asian operations.

The total amount of the change in fair value estimation using valuation techniques, includingvaluation techniques based on assumptions not wholly supported by observable market prices or rates,recognized in the income statement in 2007 was a gain of £101 million (2006: gain of £47 million) forthe with-profits fund investments. Changes in values of assets of the with-profits funds are reflected inpolicyholder liabilities and unallocated surplus. Due to the liability accounting treatment of unallocatedsurplus, changes in values of securities held by with-profits funds have no direct effect on the profit orloss attributable to shareholders or shareholders’ equity.

The total amount of the change in fair value estimation using valuation techniques, including thosebased on assumptions not wholly supported by observable market prices or rates, recognized in theincome statement in 2007 and which was attributable to shareholders, was a gain of £138 million (2006:gain of £68 million) for the PRIL and US investments.

Determining impairments relating to financial assets

Available-for-sale securities

1. Information regarding the 2007 and 2006 results

Financial investments carried on an available-for-sale basis are represented by Jackson’s and Egg’sdebt securities portfolio. These are considered to be impaired if there has been a significant orprolonged period of decline in fair value below its amortized cost or if there is objective evidence ofimpairment. The consideration of this requires management’s judgment. Among the factors considered iswhether the decline in fair value results from a change in quality of the security itself, or from adownward movement in the market as a whole and the likelihood of recovering the carrying value basedon the current and short-term prospects of the issuer.

Unrealized losses that are considered to be primarily the result of market conditions, such asincreasing interest rates, unusual market volatility, or industry-related events, and where the Group alsobelieves there is a reasonable expectation for recovery and, furthermore, it has the intent and ability tohold the investment until maturity or the market recovers, are usually determined to be temporary.Prudential’s review of fair value involves several criteria including economic conditions, credit lossexperience, other issuer-specific developments and future cash flows. These assessments are based onthe best available information at the time. Factors such as market liquidity, the widening of bid/askspreads and a change in cash flow assumptions can contribute to future price volatility. If actualexperience differs negatively from the assumptions and other considerations used in the consolidatedfinancial statements, unrealized losses currently in equity may be recognized in the income statement infuture periods.

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In 2007 Impairment losses recognized on available-for-sale securities amounted to £30 million (2006:£24 million). Of this amount, 14 per cent (2006: 76 per cent) has been recorded on structured asset-backed securities, primarily due to reduced cash flow expectations on such securities that arecollateralized by diversified pools of primarily below investment grade securities. 57 per cent (2006:24 per cent) of the losses related to the impairment of fixed maturity securities of the top five individualcorporate issuers, reflecting a deteriorating business outlook of the companies concerned.

In 2007, the Group realized gross losses on sales of available-for-sale securities of £86 million(2006: £58 million). 46 per cent (2006: 30 per cent) of these losses related to the disposal of fixedmaturity securities of six (2006: six) individual issuers, which were disposed of to rebalance the portfolioin the US operations in response to the unstable mortgage lending market in the US.

The effect of those reasonably likely changes in the key assumptions underlying the estimates thatunderpin the assessment of whether impairment has taken place depends on the factors describedabove. A key indicator of whether such impairment may arise in future, and the potential amounts atrisk, is the profile of gross unrealized losses for fixed maturity and equity securities accounted for on anavailable-for-sale basis by reference to the time periods by which the securities have been heldcontinuously in an unrealized loss position and by reference to the maturity date of the securitiesconcerned.

For 2007, the difference between the carrying value and book cost of equity securities in grossunrealized loss position was nil (2006: £(1) million).

The following table shows the amounts of gross unrealized losses for fixed maturity securitiesclassified as available-for-sale under IFRS in an unrealized loss position for the time periods indicated asat December 31, 2007 and 2006.

The unrealized losses in the US insurance operations balance sheet on unimpaired fixed maturitysecurities classified as available-for-sale under IFRS are (£439) million (2006: £(256) million). This reflectsassets with fair market value and book value of £10,291 million and £10,730 million respectively.

The following table shows some key attributes of the fixed maturity securities that are in anunrealized loss position at December 31, 2007 and 2006.

Fair value of fixed maturity securities as a percentage Fair value Unrealized loss Fair value Unrealized lossof book value 2007 2007 2006 2006

£m £m £m £m

Between 90% and 100% . . . . . . . . . . . . . . . . . 9,370 (274) 10,941 (248)Between 80% and 90% . . . . . . . . . . . . . . . . . . 784 (122) 61 (8)Below 80% . . . . . . . . . . . . . . . . . . . . . . . . . . 137 (43) — —

10,291 (439) 11,002 (256)

Included within the table above are amounts relating to sub-prime and Alt-A securities of:

Fair value of fixed maturity securities as a percentage of book value Fair value Unrealized loss

£m £m

Between 90% and 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572 (24)Between 80% and 90% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 (22)Below 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (10)

732 (56)

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Aged analysis of unrealized losses for the periods indicated:

2007 2006

Non- Non-Not investment Investment Not investment Investment

rated grade grade Total rated grade grade Total

£m £m £m £m £m £m £m £m

Less than 6 months . . . . . . . . (7) (8) (52) (67) (1) (1) (14) (16)6 months to 1 year . . . . . . . . (10) (21) (105) (136) (3) (1) (10) (14)1 year to 2 years . . . . . . . . . . (5) (2) (16) (23) (24) (10) (135) (169)2 years to 3 years . . . . . . . . . (24) (10) (140) (174) (5) — (9) (14)3 years to 4 years . . . . . . . . . (3) (1) (5) (9) (5) — (35) (40)4 years to 5 years . . . . . . . . . (3) — (24) (27) — — — —5 years to 6 years . . . . . . . . . — — — — (2) (1) — (3)6 years to 7 years . . . . . . . . . (1) (2) — (3) — — — —

(53) (44) (342) (439) (40) (13) (203) (256)

At December 31, 2007, the gross unrealized losses in the balance sheet for the sub-prime and Alt-Asecurities in an unrealized loss position were £56 million. Sub-prime and Alt-A securities with unrealizedlosses of £37 million in the balance sheet at December 31, 2007 have been in an unrealized lossposition for less than one year with the remaining securities with unrealized losses of £19 million beingin an unrealized loss position for more than one year.

The following table shows the amount of gross unrealized losses for fixed maturity securitiesclassified as available-for-sale under IFRS in an unrealized loss position by maturity date of the securitiesas at December 31, 2007 and 2006.

2007 2006

£m £m

Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1)1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (29)5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (164) (113)More than 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60) (51)Mortgage-backed securities and other debt securities . . . . . . . . . . . . . . . . . . . . . . . . (160) (62)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (439) (256)

2. Information regarding the position as at March 31, 2008

On April 17, 2008, Prudential published its first quarter 2008 Interim Management Statement withthe UK Listing Authority. In light of the unusual prevailing credit market conditions, market participants’potential focus on Jackson’s available-for-sale securities, and the changes to the value of such securitiessince December 31, 2007, this statement included details on the financial position as at March 31, 2008as follows:

Jackson’s overall credit exposure remains tightly controlled. The exposure is well within Group riskparameters and Jackson continues to manage it proactively. For securities classified as available-for -saleunder IAS 39, at March 31, 2008 there was an increase in the net unrealized loss position of£459 million from £136 million at December 31, 2007. This increase reflects exceptional marketconditions.

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Jackson remains confident of the quality of its overall portfolio of £19 billion of debt securities.90 per cent of its gross unrealized loss is on investment grade securities. Of the £257 million of grossunrealized losses on securities with a fair value of less than 80 per cent of book value, only £28 millionis on securities which are non-investment grade. In addition, there were no credit defaults in the directinvestment portfolio in the quarter and downgrades were immaterial. As stated with Prudential’s 2007results announcement, Jackson holds its debt securities with the intent and ability to hold them for thelonger-term.

Jackson’s portfolio of debt securities is managed proactively: 21 credit analysts closely and regularlymonitor and report on the credit quality of its holdings. Jackson continues to review its investments on acase-by-case basis to determine whether any decline in fair value represents an other-than-temporaryimpairment. At March 31, 2008 for all securities for which there was a temporary impairment recorded,management has the ability and intent to hold for the longer-term.

In the first quarter of 2008, Jackson recorded £24 million of other-than-temporary impairment lossesof which £11 million related to Alt-A holdings. This is more than the normalized risk margin charge(RMR) to the Group’s supplementary performance reporting measure of operating profits based onlonger-term investment returns of £12 million.

For Jackson’s securities classified as available-for-sale under IAS 39, at March 31, 2008 there was anet unrealized loss position of £459 million. This amount comprised £335 million of gross unrealizedgains and £794 million of gross unrealized losses on individual securities. Included within the grossunrealized losses is £257 million for securities which are valued at less than 80 per cent of book value.For securities valued at less than 80 per cent of book value, 89 per cent are investment grade. 97 percent of the securities valued at less than 80 per cent of book value have been at this level for less than6 months.

The following notes on Jackson’s debt securities were also provided with the April 17, 2008announcement.

a Movement in the values at March 31, 2008:

Changereflected

directly inMarch 31, shareholders’ December 31,

2008 equity 2007

£m £m £m

Assets fair value at below book valueBook value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,345 10,730Unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (794) (355) (439)

Fair value (as included in the balance sheet) . . . . . . . . 10,551 10,291

Assets fair value at or above book valueBook value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,882 8,041Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . 335 32 303

Fair value (as included in the balance sheet) . . . . . . . . 8,217 8,344

TotalBook value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,227 18,771Net unrealized (loss) gain . . . . . . . . . . . . . . . . . . . . (459) (323) (136)

Fair value (as included in the balance sheet) . . . . . . . . 18,768 18,635

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b Debt securities in an unrealized loss position

The following table shows the fair value of the fixed maturity securities in a gross unrealized lossposition for various percentages of book value:

Fair value Unrealized loss Fair value Unrealized lossMarch 31, March 31, December 31, December 31,

2008 2008 2007 2007

£m £m £m £m

Between 90% and 100% . . . . . . . . . . . . . . 8,232 (278) 9,370 (274)Between 80% and 90% . . . . . . . . . . . . . . . 1,601 (259) 784 (122)Below 80% . . . . . . . . . . . . . . . . . . . . . . . 718 (257) 137 (43)

10,551 (794) 10,291 (439)

c Subprime and Alt-A exposures

As at March 31, 2008 Jackson held £219 million in subprime exposure and £0.6 billion in Alt-Aexposure. Alt-A are debt securities backed by collateral consisting of mortgages where the risk profilefalls between prime and subprime. This subprime exposure, which is primarily fixed rate with first liencollateral, is all investment grade and 96 per cent AAA rated. The Alt-A exposure is 79 per cent AAArated. With an average Fair, Isaac & Co (‘‘FICO’’) credit score of 610-620 Jackson’s subprime collateralcould be categorized as ‘‘near prime’’ with a score close to a prime score of 660.

Assets held at amortized cost

Loans and receivables are carried at amortized cost using the effective interest rate method. Theloans and receivables include loans collateralized by mortgages, deposits and loans to policyholders. Forthese assets, the Group measures the amount of any impairment loss by comparing the carrying amountof the asset with the present value of its estimated future cash flows.

In estimating future cash flows, the Group looks at the expected cash flows of the assets andapplies historical loss experience of assets with similar credit risks that has been adjusted for conditionsin the historical loss experience which no longer exist, or for conditions that are expected to arise. Theestimated future cash flows are discounted using the financial asset’s original or variable effectiveinterest rate and exclude credit losses that have not yet been incurred.

The risks inherent in reviewing the impairment of any investment include the risk that marketresults may differ from expectations; facts and circumstances may change in the future and differ fromestimates and assumptions; or the Group may later decide to sell the security as a result of changedcircumstances.

The principal holdings of loans and receivables where credit risk was of particular significance wereloans and advances to customers held by Egg. Egg was sold in May of 2007 (see note J to theconsolidated financial statements).

Changes in the estimates of credit risk in any reporting period could result in a change in theallowance for losses on the loans and advances.

Insurance contracts

Product classification

IFRS 4 requires contracts written by insurers to be classified as either ‘‘insurance contracts’’ or‘‘investment contracts’’ depending on the level of insurance risk transferred. If significant insurance riskis transferred by the contract then it is classified as an insurance contract. Contracts that transferfinancial risk but not significant insurance risk are termed investment contracts. Furthermore, some

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contracts, both insurance and investment, contain discretionary participation features representing thecontractual right to receive additional benefits as a supplement to guaranteed benefits:

(a) that are likely to be a significant portion of the total contractual benefits;

(b) whose amount or timing is contractually at the discretion of the insurer; and

(c) that are contractually based on asset or fund performance, as discussed in IFRS 4.

Accordingly, insurers must perform a product classification exercise across their portfolio ofcontracts issued to determine the allocation to these various categories. IFRS 4 permits the continuedusage of previously applied GAAP for insurance contracts and investment contracts with discretionaryparticipating features. Except for UK regulated with-profits funds, as described below, this basis hasbeen applied by the Group.

For investment contracts that do not contain discretionary participating features, IAS 39 and, wherethe contract includes an investment management element, IAS 18, apply measurement principles toassets and liabilities attaching to the contract.

Valuation assumptions

(i) Contracts of with-profits funds

The Group’s insurance contracts and investment contracts with discretionary participating featuresare primarily with-profits and other protection type policies. For UK regulated with-profits funds, thecontract liabilities are valued by reference to the FSA realistic basis. In aggregate this basis has theeffect of placing a value on the liabilities of UK with-profits contracts, which reflects the amountsexpected to be paid based on the current value of investments held by the with-profits funds andcurrent circumstances.

The basis of determining liabilities for the Group’s with-profits business has little or no effect on theresults attributable to shareholders. This is because movements on liabilities of the with-profits funds areabsorbed by the unallocated surplus. The unallocated surplus represents the excess of assets overliabilities that have yet to be appropriated between policyholders and shareholders. Except throughindirect effects, or in remote circumstances as described below, changes to liability assumptions aretherefore reflected in the carrying value of the unallocated surplus rather than shareholders’ equity.

A detailed explanation of the basis of liability measurement is contained in note D2(e)(ii) to thefinancial statements. Key elements of the value placed on the liabilities are that:

(a) The component for the with-profits benefit reserve is based on retrospective calculation ofdocumented asset shares. Asset shares are calculated as the accumulation of all items ofincome and outgo that are relevant to each policy type; and

(b) The component for future policyholder related liabilities includes a market consistent valuationof costs and guarantees, options and smoothing determined using either a stochastic approach,hedging costs or a series of deterministic projections with attributed probabilities.

The Group’s other with-profits contracts are written in with-profits funds that operate in some ofthe Group’s Asian operations. The liabilities for these contracts and those of Prudential AnnuitiesLimited, which is a subsidiary company of the PAC with-profits funds, are determined differently. Forthese contracts the liabilities are estimated using actuarial methods based on assumptions relating topremiums, interest rates, investment returns, expenses, mortality and surrenders. The assumptions towhich the estimation of these reserves is particularly sensitive are the interest rate used to discount theprovision and the assumed future mortality experience of policyholders.

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For liabilities determined using the basis described above for UK regulated with-profits funds, andthe other liabilities described in the preceding paragraph, changes in estimates arising from the likelyrange of possible changes in underlying key assumptions have no direct impact on the reported profit.

This lack of sensitivity reflects the with-profits fund structure, basis of distribution, and theapplication of previous GAAP to the unallocated surplus of with-profits funds as permitted by IFRS 4.Except for unlikely circumstances, where the net assets are insufficient to meet the obligations andcapital requirements of the funds, such as those described in note H14, changes in liabilities of thesecontracts that are caused by altered estimates are absorbed by the unallocated surplus of thewith-profits funds with no direct effect on shareholders’ equity.

(ii) Other contracts

Contracts, other than those of with-profits funds, are written in shareholder-backed operations ofthe Group. The significant shareholder-backed product groupings and the factors that may significantlyaffect IFRS results due to experience against assumptions or changes of assumptions vary significantlybetween business units. For some types of business the effect of changes in assumptions may besignificant, whilst for others, due to the nature of the product, assumption setting may be of lesssignificance. The nature of the products and the significance of assumptions are discussed in notes D2,D3 and D4 to the consolidated financial statements. From the perspective of shareholder’s results, thekey sensitivity relates to assumed future investment returns for the Taiwan life operation as describedbelow.

Jackson

Jackson offers individual fixed annuities, fixed index annuities, immediate annuities, variableannuities, individual and variable life insurance and institutional products. With the exception ofinstitutional products and an incidental amount of business for annuity certain contracts, which areaccounted for as investment contracts under IAS 39, all of Jackson life assurance contracts areaccounted for under IFRS 4 as insurance contracts by applying US GAAP, the previous GAAP usedbefore IFRS adoption. Under US GAAP the requirements of SFAS 60 ‘Accounting and Reporting forInsurance Enterprises’ and SFAS 97 ‘Accounting and Reporting by Insurance Enterprises for certainLong-Duration Contracts and for Realized Gains and Losses from the Sale of Investments’ apply to thesecontracts. The accounting requirements under these standards and the effect of changes in valuationassumptions are considered below for fixed annuity, variable annuity and traditional life insurancecontracts.

Fixed annuity contracts, which are treated as investment contracts under US GAAP terminology, areaccounted for by applying in the first instance a retrospective deposit method to determine the liabilityfor policyholder benefits. This is then augmented by potentially three additional amounts, namelydeferred income, any amounts previously assessed against policyholders that are refundable ontermination of the contract, and any premium deficiency, i.e., any probable future loss on the contract.These types of contract contain considerable interest rate guarantee features. Notwithstanding theaccompanying market risk exposure, except in the circumstances of interest rate scenarios where theguarantee rates included in contract terms are higher than crediting rates that can be supported fromassets held to cover liabilities, the accounting measurement of Jackson’s fixed annuity products is notgenerally sensitive to interest rate risk. This position derives from the nature of the products and theUS GAAP basis of measurement.

Variable annuity contracts written by Jackson may provide for guaranteed minimum death, income,or withdrawal features. In general terms, liabilities for these benefits are accounted for under US GAAPby using estimates of future benefits and fees under best estimate assumptions. For variable annuitybusiness the key assumption is the expected long-term level of equity market returns which for 2007

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and 2006 was 8.4 per cent per annum determined using a mean reversion methodology. Likely changesto this percentage return are not expected to be significant.

These returns affect the level of future expected profits through their effects on the fee incomewith consequential impact on the amortization of deferred acquisition costs as described below and therequired level of provision for guaranteed minimum death benefit claims.

For traditional life insurance contracts, provisions for future policy benefits are determined underSFAS 60 using the net level premium method and assumptions as of the issue date as to mortality,interest, policy lapses and expenses plus provisions for adverse deviation.

Except to the extent of mortality experience, which primarily affects profits through variations inclaim payments and the guaranteed minimum death benefit reserves, the profits of Jackson are relativelyinsensitive to changes in insurance risk.

Asian operations

The insurance products written in the Group’s Asian operations principally cover with-profitsbusiness, unit-linked business, and other non-participating business. The results of with-profits businessare relatively insensitive to changes in estimates and assumptions that affect the measurement ofpolicyholder liabilities. As for the UK business, this feature arises because unallocated surplus isaccounted for by the Group as a liability. The results of Asian unit-linked business are also relativelyinsensitive to changes in estimates or assumptions.

The principal non-participating business in the Group’s Asian operations, for which changes inestimates and assumptions are important from year to year, is the traditional whole-life business writtenin Taiwan. The premiums for the in-force business for these contracts have been set by the regulator atdifferent points for the industry as a whole. Premium rates were set to give a guaranteed minimum sumassured on death and a guaranteed surrender value on early surrender based on prevailing interest ratesat the time of policy issue. Premium rates also included an allowance for mortality and expenses. Therequired rates of guarantee have fallen over time as interest rates have reduced from a high of eight percent to current levels of around two per cent. The current low bond rates in Taiwan gives rise to anegative spread against the majority of these policies. The current cash costs of funding in forcenegative spread in Taiwan is around £45 million a year.

The adequacy of the insurance contract liabilities is tested by reference to best estimates ofexpected investment returns on policy cash flows and reinvested income. The assumed earned rates areused to discount the future cash flows. The assumed earned rates consist of a long-term best estimatedetermined by consideration of long-term market conditions and rates assumed to be earned in thetrending period. For 2007 and 2006, it has been projected that rates of return for Taiwanese bond yieldswill trend from the then current levels of some 2.5 per cent (2.0 per cent) to 5.5 per cent byDecember 31, 2013.

The liability adequacy test results are sensitive to the attainment of the trended rates during thetrending period. Based on the current asset mix, margins in other contracts that are used in theassessment of the liability adequacy tests and currently assumed future rates of return, if interest rateswere to remain at current levels in 2008 and 2009 and the target date for attainment of the long-termbond yield deferred to December 31, 2015, the premium reserve, net of deferred acquisition costs,would be sufficient. If interest rates were to remain at current levels beyond the end of 2009 with thedate of the attainment of the long-term rate further delayed, the margin within the net GAAP reservewill reduce further.

However, the need to write off deferred acquisition costs or increase the liabilities, and by howmuch, would be affected by the impact of new business written between December 31, 2007 and the

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future reporting dates to the extent that the business is taken into account as part of the liabilityadequacy testing calculations for the portfolio of contracts.

The adequacy of the liability is also sensitive to the level of the projected long-term rate on bonds.The current long-term assumption of 5.5 per cent has been determined on a prudent best estimate basisby reference to detailed assessments of the financial dynamics of the Taiwanese economy. In the eventthat the rate applied was altered, the carrying value of the deferred acquisition costs and policyholderliabilities would potentially be affected.

At December 31, 2007, if the assumed long-term bond yield applied had been reduced by 0.5 percent from 5.5 per cent to 5.0 per cent and continued to apply the same progression period toDecember 31, 2013, by assuming bond yields increase from current levels in equal annual installmentsto the long-term rate, the premium reserve, net of deferred acquisition costs, would have beensufficient. The impact of reducing the long-term rate by a further 0.5 per cent to 4.5 per cent wouldhave been such that the net GAAP reserve would have met the liability adequacy test but with nomargin available to cover further deterioration. An additional 0.5 per cent reduction in the assumedlong-term rate from 4.5 per cent to 4.0 per cent would lead to a charge of some £200 million.

Whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inceptionare also written in the Korean life operations, though to a much less significant extent than in Taiwan.The business is much less sensitive to returns than Taiwan with the higher proportion of linked andhealth business.

The other area of note in respect of guarantees is the Japanese business where pricing rates arehigher than current bond yields. Lapse risk is a feature in that policyholders could potentially surrendertheir policies on guaranteed terms if interest rates significantly increased leaving the potential for lossesif bond values had depreciated significantly. However, the business is matched to a relatively shortrealistic liability duration.

For the Korean and Japanese life business exposures described above, the results are comparativelyunaffected by changes of assumption. The accounts basis value of liabilities for both operations are of asimilar order of magnitude to those that apply for the purposes of Group solvency calculations under theIGD.

Deferred acquisition costs

Significant costs are incurred in connection with acquiring new insurance business. Except foracquisition costs of with-profits contracts of the UK regulated with-profits funds, which are notrecognized under the accounting application of the realistic FSA regime, these costs, which vary with,and are primarily related to, the production of new business, are capitalized and amortized againstmargins in future revenues on the related insurance policies. The recoverability of the asset is measuredand the asset is deemed impaired if the projected future margins are less than the carrying value of theasset. To the extent that the future margins differ from those anticipated, then an adjustment to thecarrying value of the deferred acquisition cost asset will be necessary.

The deferral and amortization of acquisition costs is of most relevance to the Group’s results forshareholder-financed long-term business of Jackson and Asian operations. The majority of the UKshareholder-backed operations is for individual and group annuity business where the incidence ofacquisition costs is negligible.

Jackson

For term business, acquisition costs are deferred and amortized in line with expected premiums. Forannuity business, acquisition costs are deferred and amortized in line with expected gross profits on therelevant contracts. For interest-sensitive business, the key assumption is the long-term spread between

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the earned rate and the rate credited to policyholders, which is based on the annual spread analysis. Inaddition, expected gross profits depend on mortality assumptions, assumed unit costs and terminationsother than deaths (including the related charges), all of which are based on a combination of actualexperience of the Jackson companies, industry experience and future expectations. A detailed analysis ofactual experience is measured by the internally developed mortality studies.

For variable annuity business, as described above, the key assumption is the expected long-termlevel of equity market returns, which for 2007 and 2006 was 8.4 per cent per annum determined usinga mean reversion methodology.

Asian operations

The key shareholder-backed Asian operation is the Taiwan life business. The sensitivity of theresults for this operation, including the potential effect on write-offs of deferred acquisition costs, issignificant and is described above. There was no write-off of DAC made in 2007 or 2006.

Pensions

The Group applies the requirements of IAS 19, ‘‘Employee Benefits’’ to its defined benefit pensionschemes. Due to the inclusion of actuarial gains and losses in the income statement rather than beingrecognized directly in equity, the results of the Group are affected by changes in interest rates forcorporate bonds that affect the rate applied to discount projected pension payments and changes inmortality assumptions.

The economic participation in the surplus or deficits attaching to the main Prudential Staff PensionScheme (‘‘PSPS’’) and the smaller Scottish Amicable Pension Scheme (‘‘SAPS’’) are shared between thePAC WPSF and shareholder operations. The economic interest reflects the source of contributions overthe scheme life, which in turn reflects the activity of the members during their employment.

In the case of PSPS, movements in the apportionment of the surplus or deficit for PSPS betweenthe WPSF and shareholders’ funds in 2007 reflect the 70⁄30 ratio applied to the base deficit position as atDecember 31, 2005 but with service cost and contributions for ongoing service apportioned byreference to the cost allocation for activity of current employees.

For SAPS the ratio is estimated to be 50/50 between the WPSF and shareholders’ funds.

The table below shows the sensitivity of the PSPS liabilities of £4,361 million at December 31, 2007to changes in discount rates, inflation rates and mortality assumptions.

Impact on scheme liabilities on IAS 19Assumption Change in assumption basis

Discount rate . . . . . . . Decrease by 0.2% from 5.9% to 5.7% Increase scheme liabilities by 3.5%Discount rate . . . . . . . Increase by 0.2% from 5.9% to 6.1% Decrease scheme liabilities by 3.4%Rate of inflation . . . . . . Decrease by 0.2% from 3.3% to 3.1% Decrease scheme liabilities by 1.3%

with consequent reduction in salaryincreases

Mortality rates . . . . . . . Reduce rates from 100% of table to Increase liabilities by 1.2%95%

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Deferred tax

Deferred tax assets are recognized to the extent that they are regarded as recoverable, that is tothe extent that, on the basis of all the available evidence, it can be regarded as more likely than not thatthere will be suitable taxable profits against which the losses can be relieved. The UK taxation regimeapplies separate rules to trading and capital profits and losses. The distinction between temporarydifferences that arise from items of either a capital or trading nature may affect the recognition ofdeferred tax assets. For the 2007 results and balance sheet position at December 31, 2007, the possibletax benefit of approximately £280 million (2006: £333 million), which may arise from capital lossesvalued at approximately £1.4 billion (2006: £1.7 billion), is sufficiently uncertain that it has not beenrecognized. In addition, a potential deferred tax asset of £112 million (2006: £71 million), which mayarise from trading losses of approximately £350 million (2006: £245 million), is sufficiently uncertain thatit has not been recognized.

Goodwill

Goodwill impairment testing requires the exercise of judgment by management as to prospectivefuture cash flows.

Other features of IFRS accounting that are of particular significance to an understanding ofPrudential’s results

The other features that are of significance relate to the timing of adoption of certain IFRS standardsand their consequential impact upon the financial statements; the accounting for UK with-profits funds;and the presentation of certain items in the financial statements.

Insurance contract accounting

With the exception of certain contracts described in note D1, the Group’s life assurance contractsare classified as insurance contracts and investment contracts with discretionary participating features.As permitted by IFRS 4, assets and liabilities of these contracts (see below) are accounted for underpreviously applied generally accepted financial principles (‘‘GAAP’’). Accordingly, except as describedbelow, the modified statutory basis (‘‘MSB’’) of reporting as set out in the revised Statement ofRecommended Practice (‘‘SORP’’) issued by the Association of British Insurers (‘‘ABI’’) in November2003 has been applied.

The application of previously applied GAAP is of particular relevance to the treatment of theunallocated surplus, overseas operations and product options and guarantees.

Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’swith-profits funds that have yet to be appropriated between policyholders and shareholders. The Grouphas opted to account for unallocated surplus wholly as a liability with no allocation to equity. Thistreatment reflects the fact that shareholders’ participation in the cost of bonuses arises only ondistribution. Shareholder profits on with-profits business reflect one-ninth of the cost of declared bonus.

For Jackson, applying the MSB as applicable to overseas operations, the assets and liabilities ofinsurance contracts are accounted for under insurance accounting prescribed by US GAAP. For theassets and liabilities of insurance contracts of Asian operations, the local GAAP is applied withadjustments, where necessary, to comply with UK GAAP. For the operations in Taiwan, Vietnam andJapan, countries where local GAAP is not appropriate in the context of the previously applied MSB,accounting for insurance contracts is based on US GAAP. For participating business the liabilities includeprovisions for the policyholders’ interest in realized investment gains and other surpluses that, whereappropriate, and in particular for Vietnam, have yet to be declared as bonuses.

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The usage of these bases of accounting has varying effects on the way in which product optionsand guarantees are measured. For UK regulated with-profits funds, options and guarantees are valuedon a market consistent basis. The basis is described in note D2(e)(ii) to the financial statements. Forother operations a market consistent basis is not applied under the accounting basis described innote A4. Details of the guarantees, basis of setting assumptions, and sensitivity to altered assumptionsare described in notes D3 and D4 to the financial Statements.

Valuation and accounting presentation of fair value movements of derivatives and debtsecurities of Jackson

Under IAS 39, derivatives are required to be carried at fair value. Unless net investment hedgeaccounting is applied, value movements on derivatives are recognized in the income statement. Exceptin respect of variable annuity business, the value movements on derivatives held by Jackson areseparately identified within the short-term fluctuations in investment returns identified as part of theGroup’s supplementary analysis of results described under ‘‘Item 5’’—Additional analysis of consolidatedresults reflecting the basis used by management and reported externally to UK shareholders and the UKfinancial market’’. Derivative value movements in respect of variable annuity business are included withinthe operating profit based on longer-term investment returns also as described in that additional analysissection.

For derivative instruments of Jackson, the Group has considered at length whether it is appropriateto undertake the necessary operational changes to qualify for hedge accounting so as to achievematching of value movements in hedging instruments and hedged items in the performance statements.In reaching the decision a number of factors were particularly relevant. These were:

• IAS 39 hedging criteria has been designed primarily in the context of hedging and hedginginstruments that are assessable as financial instruments that are either stand-alone or separablefrom host contracts, rather than, for example, duration characteristics of insurance contracts;

• the high hurdle levels under IAS 39 of ensuring hedge effectiveness at the level of individualhedge transactions for specific transactions;

• the difficulties in applying the macro hedge provisions under IAS 39 (which are more suited tobanking arrangements) to Jackson’s derivative book;

• the complexity of asset and liability matching of US life insurers such as those with Jackson’sproduct range; and finally

• whether it is possible or desirable, without an unacceptable level of costs and restraint oncommercial activity, to achieve the accounting hedge effectiveness required under IAS 39.

In this regard, the issues surrounding the IAS 39 application are very similar to those considered byother US life insurers when the US financial reporting standard FAS 133 was first applied for US GAAPreporting. Taking account of these considerations the Group has decided that, except for certain minorcategories of derivatives, it is not appropriate to seek to achieve hedge accounting under IAS 39 bycompletely reconfiguring the structure of Jackson’s derivative book. As a result of this decision, the totalincome statement results are more volatile as the movements in the value of Jackson’s derivatives arereflected within it.

Under IAS 39, unless carried at amortized cost (subject to impairment provisions where appropriate)under the held-to-maturity category, debt securities are also carried at fair value. The Group has chosennot to classify any financial assets as held-to-maturity. Debt securities of Jackson are designated asavailable-for-sale with value movements being recorded as movements within shareholders’ equity.

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Accounting for with-profits business

For with-profits business (including non-participating business of Prudential Annuities Limited whichis owned by the PAC with-profits fund), adjustments to liabilities and any related tax effects arerecognized in the income statement. However, except for any impact on the annual declaration ofbonuses, shareholder profits for with-profits business and shareholders’ funds would not be affected byadjustments to liabilities. This is because the income statements solely reflect one-ninth of the cost ofbonuses declared for with-profits policies for the year.

Adjustments to the long-term business provision for the PAC with-profits fund would normallyreflect changes that have also been reflected in the annual regulatory returns submitted to the FSA.Except to the extent of any second order effects on other elements of the regulatory returns, suchchanges can be expected to have a consequent effect on the excess of assets over liabilities of the fundfor the purposes of solvency calculations, and the related free asset ratio which is an indicator of theoverall financial strength of the fund. Similar principles apply to the Group’s Asian with-profits business.

Profits Recognition

As outlined in ‘‘—Analysis by Business Segment and Geographic Region—United Kingdom—Basisof Profits’’ below, Prudential’s results include an annual profit distribution to shareholders from long-termwith-profits funds that represents an amount of up to one-ninth of the value of that year’s bonusdeclarations to policyholders. The distribution corresponds directly to the post-tax basis profit forwith-profits business. The boards of directors of the subsidiary companies that have with-profitsoperations, using actuarial advice, determine the amount of annual and final bonuses to be declaredeach year on each group of contracts.

Unallocated surplus

As discussed above, the unallocated surplus represents the excess of assets over policyholderliabilities of the Group’s with-profits funds. The annual excess or shortfall of income over expenditure ofthe with-profits funds after declaration and attribution of the cost of bonuses to policyholders andshareholders is transferred to, or from, the unallocated surplus through a charge or credit to the incomestatement. The balance is determined after full provision for deferred tax on unrealized appreciation ofinvestments.

Changes to the level of the unallocated surplus do not directly impact shareholders’ results orfunds. After allowing for differences in the basis of preparation of the financial statements and UKregulatory returns, movements in the level of the unallocated surplus are broadly indicative ofmovements in the excess of regulatory basis assets over liabilities of the fund. In turn, movements inthis excess as a proportion of liabilities are indicative of changes in the financial strength of the fund.Differences in the basis of preparation of financial statements and UK regulatory returns arise principallyfrom the treatment of certain regulatory basis liabilities, such as mismatching reserves (that areaccounted for as reserves within the unallocated surplus), recognition of deferred acquisition costs in thefinancial statements, and asset valuation differences and admissibility deductions reflected in theregulatory returns.

Fair Value of Assets

Changes in the fair value of assets of Prudential’s long-term with-profits funds will primarily bereflected in the excess of assets over liabilities recorded as the unallocated surplus. Shareholders’ profitsfrom with-profits business and shareholders’ funds are not directly impacted by movements in the fairvalues of the assets. However, current investment performance is a factor that is taken into account inthe setting of the annual declaration of bonuses which, in turn, affects UK shareholder profits to theextent of one-ninth of the cost of bonus.

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Changes in the fair value of assets of unit-linked (separate account) funds are normally accompaniedby a matching change in unit-linked business liabilities that is also recognized in the income statement.

Investment Returns

For with-profits business, investment returns together with other income and expenditure arerecorded within the income statement. However, the difference between net income of the fund and thecost of bonuses and related statutory transfers is reflected in an amount transferred to or from theunallocated surplus within the income statement. Except to the extent of current investment returnsbeing taken into account in the setting of bonus policy, the investment returns of with-profits fund in aparticular year do not affect shareholder profits or with-profits funds.

Presentation of results before tax

The total tax charge for the Group reflects tax that in addition to relating to shareholders’ profits isalso attributable to policyholders and unallocated surplus of with-profits funds and unit-linked policies.This is explained in more detail in note F5 to the financial statements. However, pre-tax profits aredetermined after transfers to or from unallocated surplus of with-profits funds. These transfers are inturn determined after taking account of tax borne by with-profits funds. Consequently reported profitbefore the total tax charge is not representative of pre-tax profits attributable to shareholders. In orderto provide a measure of pre-tax profits attributable to shareholders the Group has chosen to adopt anincome statement presentation of the tax charge and pre-tax results that delineates betweenpolicyholder and shareholder components.

Overview of Consolidated Results

Introduction

The following table shows Prudential’s IFRS consolidated total profit for the periods indicated.

Year Ended December 31,

2007 2006 2005

£m £m £m

Total revenue, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . 32,866 35,031 40,010Total charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,681) (32,810) (37,909)

Profit before tax* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 2,221 2,101Tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . . (19) (849) (1,147)

Profit before tax attributable to shareholders . . . . . . . . . . . . . . . . . . . 1,166 1,372 954Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (401) (1,241) (1,389)Less: tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . 19 849 1,147Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . . . . . . (382) (392) (242)

Profit from continuing operations after tax . . . . . . . . . . . . . . . . . . . . 784 980 712Discontinuing operations (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . 241 (105) 48

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 875 760

* Profit before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before taxattributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders’ profits.

Basis of preparation of overview

In Prudential’s interim and annual financial statements that appear in Prudential’s distributions to UKshareholders and the UK financial market, and in Prudential’s preliminary results release and its UK

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Annual Report, the structure of the operating and financial review has been prepared in accordance withthe basis for financial reporting used by Prudential’s management. Prudential’s management analyze IFRSprofit before shareholder tax between management’s chosen performance measure of operating profitbased on longer-term investment returns and other items.

In preparing this Form 20-F, it has been necessary for the structure of the overview of theconsolidated results to be reconfigured to meet US reporting requirements.

Under IFRS the pre-tax GAAP measure of profits is profit before policyholder and shareholdertaxes. This measure is not relevant for reflecting pre-tax results attributable to shareholders for tworeasons. First, this profit measure represents the aggregate of pre-tax results attributable to shareholdersand a pre-tax amount attributable to policyholders. Second, the amount is determined after charging thetransfer to the liability for unallocated surplus, which in turn is determined in part by policyholder taxesborne by the ring-fenced with-profits funds. It is noted that this circular feature is specific to with-profitsfunds in the UK, and other similarly structured overseas funds, and should be distinguished from otherproducts, which are referred to as ‘with-profits’ and the general accounting treatment of premium orother policy taxes.

Accordingly, Prudential has chosen to explain its consolidated results by reference to profits for theyear, reflecting profit after tax for continuing and discontinued operations. In explaining movements inprofit for the year reference is made to trends in profit before shareholder tax and the shareholder taxcharge.

Profit for the year

Profit for 2007 was £1,025 million compared with £875 million in 2006. This £150 million increasereflects an increase of £346 million in the net of tax result for discontinued operations, from a loss of£105 million in 2006 to a profit of £241 million reported in 2007, which was partially offset by adecrease in the profit from continuing operations after tax of £196 million, from £980 million to£784 million.

The decrease in profit from continuing operations after tax reflects a decrease in profits before taxattributable to shareholders of £206 million, from £1,372 million in 2006 to £1,166 million in 2007,partially offset by a £10 million decrease in the tax charge attributable to shareholders, which fell from£392 million in 2006 to £382 million in 2007. The effective tax rate in 2007 was 33 per cent comparedwith 29 per cent in 2006, both of which were similar to the expected tax rates. Further details areprovided in note F5 to the consolidated financial statements.

The decrease in profit before tax attributable to shareholders on continuing operations in 2007reflects an increase in underlying profits (as described in the additional analysis of consolidated resultsreflecting the basis used by management and reported externally to UK shareholders and the UKfinancial market) on continuing operations of £163 million, from £1,050 million in 2006 to £1,213 millionin 2007, which was more than offset by a £77 million negative movement against the prior year inactuarial gains and losses on defined benefit pension schemes, from a gain of £167 million in 2006 to again of £90 million in 2007, and a negative movement in short-term fluctuations in investment returnstaken to income, which decreased £292 million from a £155 million credit in 2006 to a £137 millioncharge in 2007.

Profit for 2006 was £875 million compared with £760 million in 2005. This £115 million increasereflected an increase in the profit from continuing operations after tax of £268 million, from £712 millionto £980 million, offset by a decrease of £153 million in the net of tax result for discontinued operations,from a profit of £48 million in 2005 to a loss of £105 in 2006.

Profit from continuing operations after tax in 2006 was £980 million compared with £712 million in2005, with the shareholder tax charge having increased to £392 million in 2006 from £242 million in

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2005. The effective tax rate in 2006 was 29 per cent compared with 24 per cent in 2005. The effectivetax rate in 2006 was close to the expected tax rate of 31 per cent (which reflects the geographic split ofprofits). The effective tax rate in 2005 was unusually low due to a number of factors, including favorablesettlements reached with the revenue authorities and being able to take credit for Egg’s losses in France.

In 2006, the growth in profit before tax attributable to shareholders on continuing operationsprimarily reflected an increase in underlying profits of £137 million from £913 million in 2005 to£1,050 million in 2006, an increase in actuarial gains and losses on defined benefit pension schemes of£217 million from a charge of £50 million in 2005 to a gain of £167 million in 2006 and no goodwillimpairment charge in 2006 against a charge of £120 million in 2005, with this partially offset by areduction in short-term fluctuations in investment returns credited to income of £56 million from a£211 million gain in 2005 to a £155 million gain in 2006.

Discontinued operations in 2007, 2006 and 2005 relates to the discontinued banking operations.The presentation of the 2006 and 2005 comparative results has been adjusted to reclassify Egg asdiscontinued operations. In addition, the 2005 results include the completion of Egg’s withdrawal fromFrance and the losses incurred by Funds Direct.

Analysis by Business Segment and Geographic Region

The Group’s reportable segments are based on the organizational structure used by managementfor making operating and investment decisions and for assessing performance. The Group’s businesssegments are insurance operations, asset management and, prior to the disposal of Egg, banking whilstits geographical segments comprise the territories in which the Group conducts business, which are theUnited Kingdom, the United States and Asia.

The following table shows Prudential’s IFRS consolidated total profit for the periods indicateddivided by business segment and geographic region. The accounting policies applied to the segmentsbelow are the same as those used in the Group’s consolidated accounts and are described in Note A4 tothe consolidated financial statements.

Total profit for the year reflecting profit after tax for continued and discontinued operations:

2007 UK US Asia Total

£m £m £m £m

Insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 300 55 660Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 4 57 243Unallocated corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (119) — — (119)

Total profit from continuing operations . . . . . . . . . . . . . . . . . . . . . . . 368 304 112 784Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 — — 241

Total profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 609 304 112 1,025

2006 UK US Asia Total

£m £m £m £m

Insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 301 227 845Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 22 37 225Unallocated corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90) — — (90)

Total profit from continuing operations . . . . . . . . . . . . . . . . . . . . . . . 393 323 264 980Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105) — — (105)

Total profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 323 264 875

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2005 UK US Asia Total

£m £m £m £m

Insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 350 148 786Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 5 0 104Unallocated corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (178) — — (178)

Total profit from continuing operations . . . . . . . . . . . . . . . . . . . . . . . 209 355 148 712Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 — — 48

Total profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257 355 148 760

Profit from Insurance operations

Total profit from Insurance operations in 2007 was £660 million compared to £845 million in2006.This decrease was driven by a 15 per cent decrease in profit before shareholder tax from£1,186 million in 2006 to £1,003 million in 2007, and an increase in the shareholder tax charge from£341 million in 2006 to £343 million in 2007.

The effective shareholder tax rate on profits from continuing insurance operations increased from29 per cent in 2006 to 34 per cent in 2007 resulting from a number of factors including disallowedexpenses and prior year adjustments in the UK, and tax losses in Asia which are not expected to beavailable against future profits.

Total profit from insurance operations in 2006 was £845 million compared to £786 million in2005.This growth was supported by a 3 per cent increase in profit before shareholder tax, from£1,152 million in 2005 to £1,186 million in 2006, and a decrease in the shareholder tax charge from£366 million in 2005 to £341 million in 2006.

This growth in profit before tax attributable to shareholders of £34 million compared to 2005primarily reflects an increase in underlying profits offset by a lower level of short-term value increaseson financial instruments.

The effective shareholder tax rate on profits from continuing insurance operations decreased from32 per cent in 2005 to 29 per cent in 2006 resulting from minor variations on the rates applicable to UKand Asian businesses.

In order to understand how Prudential’s results are derived it is necessary to understand how profitemerges from its business. This varies from region to region, primarily due to differences in the natureof the products and regulatory environment in which Prudential operates.

United Kingdom

Basis of profits

Prudential’s results comprise an annual profit distribution to shareholders from its UK long-termwith-profits fund, hereafter referred to as the with-profits fund, as well as profits from its otherbusinesses. For most of Prudential’s operations, other than its UK long-term insurance businesses, theIFRS basis of accounting matches items of income and related expenditure within the same accountingperiod. This is achieved through the deferral of acquisition costs and application of the accruals concept.

With-profits products

For Prudential’s UK insurance operations, the primary annual contribution to shareholders’ profitcomes from its with-profits products. With-profits products are designed to provide policyholders withsmoothed investment returns through a mix of annual and final bonuses. Shareholders’ profit in respectof bonuses from with-profits products represents an amount of up to one-ninth of the value of that

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year’s bonus declaration to policyholders. The smoothing inherent in the bonus declarations provides forrelatively stable annual shareholders’ profit from this business.

Bonus rates

The main factors that influence the determination of bonus rates are the return on the investmentsof the with-profits fund, the effect of inflation, taxation, the expenses of the fund chargeable topolicyholders and the degree to which investment returns are smoothed. The overall rate of returnearned on investments and the expectation of future investment returns are the most importantinfluences on bonus rates. The assets backing the with-profits business are predominantly invested inequities and real estate. If the financial strength of the with-profits fund were adversely affected, then ahigher proportion of fixed interest or similar assets might be held by the fund.

Unallocated surplus

The annual excesses of premiums and investment returns over claim payments, operating expensesand the change in policyholder provisions within Prudential’s with-profits fund that are not distributed inthat year as bonuses and related shareholders’ profit are transferred to the liability for unallocatedsurplus by a charge to the income statement of the with-profits fund. Any shortfall in such amountswould result in a transfer from the unallocated surplus by a credit to the income statement of thelong-term fund. Current year amounts in respect of premiums, investment returns, operating expensesand unusual charges or credits do not directly affect the distribution of profit to shareholders from thewith-profits business in that year. Current year claims, which include final bonus payments, do have aneffect on shareholders’ profit through the shareholders’ proportion of the value of those final bonuses.

Surplus assets and their use

The liability for unallocated surplus comprises amounts Prudential expects to pay to policyholders inthe future, the related shareholder transfers and surplus assets. These surplus assets, which aredescribed in more detail under Item 4, ‘‘Information on the Company—Business of Prudential—UKBusiness—Shareholders’ Interests in Prudential’s Long-term Insurance Business—Surplus Assets inPrudential Assurance’s Long-term With-profits Fund’’, have accumulated over many years from a varietyof sources and provide the with-profits fund with working capital. This working capital permitsPrudential to invest a substantial portion of the assets of the with-profits fund in equity securities andreal estate, smooth investment returns to with-profits policyholders, keep its products competitive, writenew business without being constrained as to cash flows in the early policy years and demonstratesolvency.

In addition, Prudential can use surplus assets to absorb the costs of significant events, such asfundamental strategic change in its long-term business and, with the consent of the UK regulator, thecost of its pension mis-selling, without affecting the level of distributions to policyholders andshareholders. The costs of fundamental strategic change may include investment in new technology,redundancy and restructuring costs, cost overruns on new business and the funding of other appropriatelong-term insurance related activities, including acquisitions.

The ‘‘SAIF’’ and ‘‘PAL’’ funds

Prudential’s with-profits fund also includes the SAIF and the wholly-owned subsidiary, PAL. Allassets of the SAIF business are solely attributable to former policyholders of Scottish Amicable LifeAssurance Society (predating the acquisition of Scottish Amicable by Prudential in October 1997). TheSAIF with-profits fund is discussed in more detail under Item 4, ‘‘Information on the Company—Businessof Prudential—UK Business—Shareholders’ Interests in Prudential’s Long-term Insurance Business—TheSAIF Sub-fund and Accounts’’. Since PAL is a wholly owned subsidiary of the with-profits fund, profits

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from this business affect shareholders’ profits only to the extent that they affect the annual with-profitsbonus declaration and resultant transfer to shareholders.

Comparison of total profit arising from UK insurance operations

The profit from UK insurance operations decreased from £317 million in 2006 to £305 million in2007. This decrease reflects an increase of £60 million in the shareholder tax charge, from £109 millionin 2006 to £169 million in 2007, which was partially offset by an increase in profit before shareholdertax of £48 million from £426 million in 2006 to £474 million in 2007.

The growth in profit before tax attributable to shareholders of £48 million primarily reflects growthin underlying profits of £52 million from £469 million in 2006 to £521 million in 2007 partially offset byan increase in short-term fluctuations in investment returns charged to income of £4 million from a£43 million charge in 2006 to a £47 million charge in 2007.

The effective shareholder tax rate on profits from UK insurance operations increased from 26 percent in 2006 to 36 per cent in 2007. The increase mainly related to disallowed expenses and prior yearadjustments arising from routine revisions of tax returns.

Profit from UK insurance operations increased from £288 million in 2005 to £317 million in 2006.

The growth in profits after tax reflected an increase in profit before shareholder tax from£416 million in 2005 to £426 million in 2006 and a decrease in the shareholder tax charge from£128 million in 2005 to £109 million in 2006.

The growth in profit before tax attributable to shareholders of £10 million primarily reflectedgrowth in underlying profits of £69 million from £400 million in 2005 to £469 million in 2006 and anincrease in actuarial gains and losses on defined benefit schemes of £20 million partially offset by anadverse movement in short-term fluctuations in investment returns taken to income of £79 million froma £36 million credit in 2005 to a £43 million charge in 2006.

The effective shareholder tax rate on profits from UK insurance operations decreased from 31 percent in 2005 to 26 per cent in 2006. This partially related to a tax credit arising from relief for excessexpenses in respect of the shareholder-backed protection business.

United States

Basis of profits

The profit on Jackson’s business predominantly arises from spread income from interest-sensitiveproducts, such as fixed annuities, institutional products and fee income on variable annuities. Except forinstitutional products and certain term annuities which are classified as investment products underIAS 39, for the purposes of IFRS reporting, deposits into these products are recorded as premiums,withdrawals and surrenders and are included in benefits and claims and the resulting net movement isrecorded under other reserve movements within benefits and claims. Benefits and claims also includeinterest credited to policyholders in respect of deposit products less fees charged on these policies.

Comparison of total profit arising from US insurance operations

Profit from US insurance operations decreased from £301 million in 2006 to £300 million in 2007.This £1 million decrease reflects a decrease in profit before shareholder tax from £451 million in 2006to £426 million in 2007, which was offset by a decrease in shareholder tax from £150 million to£126 million over the same period.

The £25 million decrease in 2007 of profit before tax attributable to shareholders reflects thechange in short-term fluctuations in investment returns of £71 million, from a gain of £53 million in

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2006 to a loss of £18 million in 2007, offset by growth in underlying profits of £46 million, from£398 million in 2006 to £444 million in 2007.

Profit from US insurance operations decreased from £350 million in 2005 to £301 million in 2006.This decrease of £49 million reflects a decrease in profit before shareholder tax from £526 million in2005 to £451 million in 2006 offset by a decrease in the shareholder tax charge from £176 million to£150 million over the same period.

The £75 million decrease in 2006 of profit before tax attributable to shareholders mainly reflectsgrowth in underlying profits of £50 million from £348 million in 2005 to £398 million in 2006 more thanoffset by a significant decrease in the accounting value of short-term fluctuations in investment returnstaken to income of £125 million from a £178 million credit in 2005 to a £53 million credit in 2006.

Asia

Basis of profits

The assets and liabilities of contracts classified as insurance under IFRS 4 are determined inaccordance with methods prescribed by local GAAP and adjusted to comply, where necessary, withUK GAAP. Under IFRS 4, subject to the conditions of that standard, the continued application ofUK GAAP in this respect is permitted.

For Asian operations in countries where local GAAP is not well established and in which thebusiness is primarily non-participating and linked business, US GAAP is used as the most appropriatereporting basis. Of the more significant Asia operations, this basis is applied in Taiwan, Japan andVietnam. For with-profits business in Hong Kong, Singapore and Malaysia the basis of profit recognitionis bonus driven as described in the section ‘‘—United Kingdom—with-profits products’’.

Comparison of total profit arising from Asian insurance operations

Profit from Asian long-term business decreased from £227 million in 2006 to £55 million in 2007.This £172 million decrease reflects a fall in profit before shareholder tax from £309 million to£103 million, which was partially offset by a decrease in shareholder tax charge from £82 million to£48 million during the same period.

The £206 million decrease in profit before tax attributable to shareholders in 2007 arose primarilyfrom a decrease in short-term fluctuations in investment returns included in the IFRS income statementof £205 million, which fell from a profit of £134 million in 2006 to a loss of £71 million in 2007. Theshort-term fluctuations for Asian operations in 2007 primarily reflect value movements in Vietnam offsetby value movements in Taiwan on the value of debt securities arising from increases in interest rates anda £30 million reduction of an investment in a CDO fund, which were partially offset by strong equitymarket movements in Vietnam. For 2006, the £134 million of short-term fluctuations mainly arose inVietnam due to strong equity returns.

The effective shareholder tax rate increased from 27 per cent in 2006 to 47 per cent in 2007. Thisincrease was due to tax losses in several jurisdictions which are not expected to be available againstfuture profits, and losses on investments in jurisdictions which do not provide corresponding tax relief.

Profit from Asian long-term business increased from £148 million in 2005 to £227 million in 2006.This £79 million increase largely reflects a rise in profit before shareholder tax from £210 million to£309 million and an increase in the shareholder tax charge from £62 million to £82 million during thesame period.

The £99 million increase in profit before tax attributable to shareholders in 2006 arose primarilyfrom an increase of £102 million in short-term fluctuations in investment returns included in the incomestatement, which increased from a gain of £32 million in 2005 to a gain of £134 million in 2006.

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The effective shareholder tax rate decreased from 30 per cent in 2005 to 27 per cent in 2006.

A goodwill impairment charge of £120 million was incurred in 2005 in respect of the Group’sJapanese life business. This charge is reflected in the explanation of profit and losses for unallocatedcorporate activity.

Profit from asset management operations

In 2007, total profit from asset management increased by £18 million from £225 million in 2006 to£243 million in 2007. This increase primarily results from an improvement in profit earned from M&G’sUK and European operations, from £166 million in 2006 to £182 million in 2007, and an increase in theGroup’s Asian operations, from £37 million in 2006 to £57 million in 2007, partially offset by a decreasein the Group’s US operations’ profit from £22 million in 2006 to £4 million in 2007.

The increase of £18 million in total profit reflects an increase of £61 million in profit beforeshareholder tax, from £283 million in 2006 to £344 million in 2007, and an increase in tax charge of£43 million, from £58 million in 2006 to £101 million in 2007.

The growth in profit before tax attributable to shareholders of £61 million primarily reflects growthin underlying profits of £73 million from £263 million in 2006 to £334 million in 2007 partially offset bya charge of £17 million in actuarial gains attributable to the M&G defined benefit pension scheme from£22 million in 2006 to £5 million in 2007.

In 2006 total profit from asset management increased by £121 million, from £104 million in 2005 to£225 million in 2006. This increase primarily resulted from an improvement in profit earned from M&G’sUK and European operations, from £99 million in 2005 to £166 million in 2006, the improvement inprofits from the Group’s Asian operations from £nil in 2005 to a profit of £37 million in 2006 and anincrease in the Group’s US operation’s profit from £5 million in 2005 to £22 million in 2006.

The increase of £121 million in total profit reflected an increase of £129 million in profit beforeshareholder tax, from £154 million in 2005 to £283 million in 2006 and an increase in the tax charge of£8 million, from £50 million in 2005 to £58 million in 2006.

The increase in profit before shareholder tax reflected growth in underlying profits of £72 millionfrom £189 million in 2005 to £261 million in 2006, an increase in short-term fluctuations in investmentreturns taken to income of £9 million from a £9 million charge in 2005 to a £nil charge in 2006 and afavorable movement of £48 million in actuarial gains attributable to the M&G defined benefit pensionscheme from a £26 million charge in 2005 to a £22 million credit in 2006.

Unallocated corporate

The total net of tax charges for unallocated corporate activity increased by £29 million, from£90 million in 2006 to £119 million in 2007. The change primarily reflects a £87 million increase inpre-tax expenditure, from £97 million in 2006 to £181 million in 2007, offset by an increase of£54 million in the tax credit, from £8 million in 2006 to £62 million in 2007.

The increase in pre-tax expenditure primarily reflects a decrease in shareholders’ share in actuarialgains and losses on defined benefit pension schemes, an increase in the level of underlying expenditureand losses on short-term fluctuations in investment returns. There was no goodwill impairment chargefor 2007 or 2006.

Total net of tax charges for unallocated corporate activity decreased by £88 million from£178 million in 2005 to £90 million in 2006. The change primarily reflects a £255 million decrease inpre-tax expenditure from £352 million in 2005 to £97 million in 2006 offset by an decrease of£166 million in the tax credit, from £174 million in 2007 to £8 million in 2006.

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The decrease in pre-tax expenditure primarily reflects an increase in the level of underlyingexpenditure offset by an increase in the short-term value gains and technical adjustments forconsolidated investment funds, an increase in shareholder actuarial gains on defined benefit schemesand there was no goodwill impairment charge for 2006. In 2005 there was a goodwill impairment chargeof £120 million in respect of the Japanese life insurance business.

Discontinued operations

The Group’s discontinued operations primarily relate to the UK banking business following the saleof Egg. The profit (loss) from discontinued operations moved from a loss of £105 million in 2006 to aprofit of £241 million in 2007 primarily as a result of a £290 million profit on the sale of Egg which, waspartially offset by a £49 million trading loss incurred by Egg prior to its disposal. The £105 million lossin 2006 relates to trading losses incurred by Egg during the period. Additional information is set forth innote J1 to the consolidated financial statements.

Business Segment and Geographical Analysis by Nature of Revenue and Charges

The following table shows Prudential’s consolidated total revenue and consolidated total charges forthe following periods.

Year Ended December 31,

2007 2006 2005

(In £ Millions)

Gross earned premiums (note a) . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,359 16,157 15,225Outward reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . (171) (171) (197)

Earned premiums, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 18,188 15,986 15,028Investment income (note b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,221 17,128 23,120Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,457 1,917 1,862

Total revenue, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . 32,866 35,031 40,010

Benefits and claims and movement in unallocated surplus of with-profitsfunds (note c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,990) (28,421) (33,100)

Acquisition costs and other operating expenditure (note d) . . . . . . . . . (4,523) (4,212) (4,514)Finance costs: interest on core structural borrowings of shareholder-

financed operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (168) (177) (175)Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (120)

Total charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,681) (32,810) (37,909)

Profit before tax* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 2,221 2,101Tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . . (19) (849) (1,147)

Profit before tax attributable to shareholders . . . . . . . . . . . . . . . . . . . 1,166 1,372 954Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . . . . . . (382) (392) (242)

Profit from continuing operations after tax . . . . . . . . . . . . . . . . . . . . 784 980 712Discontinued operations (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . 241 (105) 48

Total profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 875 760

* Profits before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before taxattributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders’ profits.

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(a) Gross earned premiums

Year Ended December 31,

2007 2006 2005

(In £ Millions)

UK Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,477 7,028 7,881US Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,860 5,390 4,348Asian Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,022 3,739 2,996

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,359 16,157 15,225

Gross earned premiums, net of reinsurance, for long-term business totaled £18,359 million in 2007compared to £16,157 million in 2006. The increase in gross earned premiums in 2007 against 2006 wasdriven by growth across all regions during the year.

Gross earned premiums totaled £16,157 million in 2006 compared to £15,225 million in 2005. Theincrease in earned premiums compared with 2005 was contributed largely from the growth in earnedpremiums in the US and Asian operations, which was partially offset by a decrease in the UK operations.

United Kingdom

Gross earned premiums for Prudential UK increased by 6 per cent in the year from £7,028 millionin 2006 to £7,477 million in 2007, primarily driven by an increase in bulk transfers, which was partiallyoffset by a reduction in credit life insurance sales following the non-renewal of the credit life contactpreviously held with Lloyds TSB.

The decrease in the earned premiums in 2006 largely reflects decreased sales in the wholesalemarket as Prudential UK undertook a selective participation strategy to ensure margins and profitabilitywere maintained in a period when the market experienced increased competition.

United States

Gross earned premiums increased by 9 per cent from £5,390 million in 2006 to £5,860 million in2007. This increase was driven primarily by a continued increase in variable annuity sales. Fixed indexannuity sales however were down, affected by the impact of low interest rates on caps and participationrates that are offered.

Gross earned premiums from insurance contracts increased by 24 per cent in 2006 from£4,348 million in 2005 to £5,390 million in 2006 driven largely by strong growth in Jackson’s variableannuity business. Jackson delivered record variable annuity sales in 2006. This reflects its distinctcompetitive advantages of an innovative product offering, an efficient and flexible technology platform, arelationship-driven distribution model and award-winning service.

The growth in sales of variable annuities in 2006 was partially offset by lower sales of fixedannuities and fixed index annuities. Entry spreads for fixed annuities continued to be challenging during2006, which limited the attractiveness of the market to Jackson, whilst fixed index annuity salescontinued to be affected by the uncertain regulatory environment in the United States.

Asia

Gross earned premiums increased by 34.3 per cent to £5,022 million in 2007 compared to£3,739 million in 2006 due to a rise in single premiums and the accumulative effects of the growth inregular premium income.

Prudential distributes its products in Asia predominantly through a network of agents. The agentnumbers at the end of 2007 increased by 123 per cent in India to 277,000 agents and in China by

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38 per cent to 20,500 in China. Prudential also has a large partnership distribution network in Asia andhas continued to broaden its range of linked products.

Gross earned premiums in 2005 and 2006 were £2,996 million and £3,739 million, respectively, anincrease of 24.8 per cent in 2006.

While the majority of these gross earned premiums in 2006 related to sales made through Asia’stied agency distribution channel, Prudential believed that there was potential to expand alternatechannels, particularly banks and direct marketing.

The number of agents at the end of 2006 had increased by 114,000 in India, 11,000 in Indonesiaand 5,000 in China compared to 2005. Distribution from non-agency channels also grew strongly in2006. Strong growth from bank distribution included record new business volumes from SCB in HongKong, an increasing proportion of new business from ICICI Bank in India and encouraging growth fromMaybank and Singpost in Singapore.

(b) Investment income

Year Ended December 31,

2007 2006 2005

£m £m £m

UK Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,263 12,472 19,959US Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,140 2,937 2,391Asian Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,818 1,719 770

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,221 17,128 23,120

Investment income consists of interest income, dividends and realized and unrealized gains andlosses on investments designated as fair value through profit and loss.

United Kingdom

In the United Kingdom, investment income decreased from £12,472 million in 2006 to£8,263 million in 2007. This decrease is due to a reduction of £3,726 million in net unrealized gainsreflecting the decrease in market returns in 2007 compared to 2006 and a decrease of £491 million ininterest and dividends, which is partially offset by an increase of £8 million in net realized gains.

In the United Kingdom, investment income decreased from £19,959 million in 2005 to£12,472 million in 2006. This decrease is due to between a reduction of £10,022 million in netunrealized gains on 2005 which is offset partially by an increase of £1,520 million in interest anddividends and an increase of £1,015 million in net realized gains.

The investment income for UK operations primarily represents the return on the assets supportingthe PAC long-term fund. The PAC with-profits sub-fund delivered a pre-tax return of 7.2 per cent in2007 compared with a pre-tax return of 12.4 per cent in 2006. Over the last five years the fund hasachieved a total return of 91 per cent. Prudential UK continuously evaluates prospects for differentmarkets and asset classes. During the year PAC’s long-term fund reduced its exposure to property andincreased the quality of its corporate bond portfolio.

United States

In the United States, investment income decreased from £2,937 million in 2006 to £2,140 million in2007. The decrease in investment income in 2007 is mainly due to a decrease of £752 million in incomereceived such as dividends and interest, primarily in respect of linked liabilities, and a decrease of£41 million in realized gains.

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Investment income increased from £2,391 million in 2005 to £2,937 million in 2006. The increase ininvestment income in 2006 was mainly due to an increase of £697 million in income received such asdividends and interest offset partially by a decrease of £182 million in realized gains.

Asia

In Asia, investment income increased from £1,719 million in 2006 to £1,818 million in 2007. Thisincrease is mainly driven by an increase in realized gains on investments.

Investment income increased from £770 million in 2005 to £1,719 million in 2006. This increasewas mainly driven by an increase in net unrealized gains on investments.

(c) Benefits and claims and movement in unallocated surplus of with-profits funds

Year Ended December 31,

2007 2006 2005

(In £ Millions)

UK Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,172) (17,030) (24,782)US Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,096) (7,291) (5,591)Asian Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,722) (4,100) (2,727)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,990) (28,421) (33,100)

Benefits and claims represent payments, including final bonuses, to policyholders in respect ofmaturities, surrenders and deaths plus the change in technical provisions (which primarily represents themovement in amounts owed to policyholders). Movement in unallocated surplus of with-profits fundsrepresents the transfer to (from) the unallocated surplus each year through a charge (credit) to theincome statement of the annual excess (shortfall) of income over expenditure of the with-profits funds,after declaration and attribution of the cost of bonuses to policyholders and shareholders.

Total benefits and claims decreased by £1,431 million in 2007 to £26,990 million compared to£28,421 million in 2006. Total benefits and claims decreased by £4,679 million in 2006 to£28,421 million, compared to £33,100 million in 2005. These movements principally reflect themovement in policyholder liabilities as a result of the decrease or increase in investment incomediscussed above, which has been passed on to the policyholders in the form of bonus declaration forwith-profits products or through the corresponding decrease or increase in policyholder liabilities forunit-linked and similar products, or transfer to unallocated surplus.

United Kingdom

Overall benefits, claims and the transfer to unallocated surplus decreased to £14,172 million in2007 from £17,030 million in 2006 and £24,782 million in 2005. The decrease in the charge for theperiod partially resulted from decreased market returns, which in turn affected policyholder benefitsfrom unit-linked and similar products, as the asset returns on the attached pool of assets werenegatively affected by a weaker market. The 2006 benefits and claims included an increase in reservesrelating to the Royal London in-force annuity book transaction.

Similarly, there is a close correlation between the level of increase in the values of assets of thefunds and the level of a combined charge for benefits and movement on unallocated surplus. With grossprofit market returns of 7.2 per cent on the with-profits fund in 2007 compared to 12.4 per cent in2006, there is an attendant decrease in the charge to the income statement.

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United States

In 2007, the accounting charge for benefits and claims decreased by 3 per cent to £7,096 millioncompared to 2006. In 2006, the accounting charge for benefits and claims increased by 30 per cent to£7,291 million compared to 2005.

The charges in 2007, 2006 and 2005 reflect underlying movements in claims, benefits andmaturities for contracts classified as insurance products under IFRS 4.

Asia

In 2007, benefits and claims totaled £5,722 million, up 39.6 per cent on £4,100 million in 2006,reflecting primarily an increase in policyholder benefits of 27 per cent from £1,117 million in 2006 to£1,420 million in 2007 and an increase in the movement in policyholder liabilities and unallocatedsurplus of with-profit funds of 44 per cent from £2,974 million in 2006 to £4,293 million in 2007.

In 2006, benefits and claims totaled £4,100 million, up 50.3 per cent on £2,727 million in 2005,reflecting primarily an increase in policyholder benefits of 19 per cent from £938 million in 2005 to£1,117 million in 2006 and an increase in the movement in policyholder liabilities and unallocatedsurplus of with-profit funds of 67 per cent from £1,780 million in 2005 to £2,974 million in 2006.

(d) Acquisition costs and other operating expenditure

Year Ended December 31,

2007 2006 2005

£m £m £m

UK Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,716) (2,462) (2,980)US Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (730) (800) (767)Asian Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,077) (950) (767)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,523) (4,212) (4,514)

Total acquisition costs and other operating expenditure of £4,523 million in 2007 was 7.4 per centhigher than the £4,212 million incurred in 2006. Total acquisition costs and other operating expenditureof £4,212 million in 2006 was 7 per cent lower than the £4,514 million incurred in 2005.

United Kingdom

Total UK acquisition costs and other operating expenses in 2007 were £2,716 million, compared to£2,462 million in 2006. The increase of £254 million in 2007 mainly relates to an increase in operatingexpenses from £1,157 million to £1,739 million and lower acquisitions costs from £619 million in 2006to £229 million in 2007.

Total UK acquisition costs and other operating expenses in 2006 were £2,462 million, compared to£2,980 million in 2005. The decrease of £518 million in 2006 mainly relates to a decrease in operatingexpenses from £1,563 million to £1,157 million and a lower acquisition costs from £742 million in 2005to £619 million in 2006.

United States

Acquisition costs and other operating expenses of £730 million in 2007 were 9 per cent lower thanexpenses in 2006 of £800 million. The decrease primarily reflects a decrease in interest payable from£269 million in 2006 to £148 million in 2007 partially offset by higher amortization of DAC from£203 million in 2006 to £303 million in 2007.

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Acquisition costs and other operating expenses of £800 million in 2006 were 4 per cent higher thanexpenses in 2005 of £767 million. The increase primarily reflects higher US interest rates resulting in anincrease in interest payable from £147 million in 2005 to £269 million in 2006 offset partially by loweramortization of DAC from £276 million in 2005 to £203 million in 2006.

Asia

Total Asian acquisition costs and other operating expenses in 2007 were £1,077 million, an increaseof £127 million compared to £950 million in 2006. This increase mainly reflects an increase in operatingcosts from £440 million in 2006 to £508 million in 2007.

Total Asian acquisition costs and other operating expenses in 2006 were £950 million, an increaseof £183 million compared to £767 million in 2005. This increase reflects an increase in DAC amortizationfrom £431 million in 2005 to £465 million in 2006 and an increase in operating expenses from£401 million in 2005 to £440 million in 2006.

Additional analysis of consolidated results reflecting the basis used by management andreported externally to UK shareholders and the UK financial market

For many years, the assessment of performance by management has been, and continues to be,applied to profit before shareholder tax by analysis of the result between operating profit based onlonger-term investment returns and other reconciling items. The focus on profit before shareholder tax,rather than profit before policyholder and shareholder tax, reflects the shareholders’ interests insurpluses as they arise and the regulatory basis of ring-fenced long-term funds in the United Kingdom.In particular, taxes borne by policyholders of with-profits contracts are borne by the liability forunallocated surplus of with-profits funds.

Until the adoption of IFRS, operating profit based on longer-term investment returns was a GAAPmeasure arising from the specific recommendation of the Statement of Recommended Practice (SORP)for accounting for insurance business issued by the ABI. With the adoption of IFRS, the ABI SORP is nolonger authoritative literature for the purposes of determining GAAP measures. Nevertheless, itcontinues to be the basis applied by the Company for internal performance assessment and afundamental element of the analysis provided to shareholders and the UK stock market. The analysisthat follows reflects information published with the Group’s results on March 14, 2008.

The Group uses a performance measure of operating profit based on longer-term investmentreturns, excluding charges for goodwill impairment and actuarial and other gains and losses on definedbenefit pension schemes. The directors believe that this performance measure better reflects underlyingperformance. It is the basis used by management for the reasons outlined below. It is also the basis onwhich analysis of the Group’s results has been provided to UK shareholders and the UK financial marketfor some years under long standing conventions for reporting by proprietary UK life assurers.

Longer-term investment returns included within the performance measure are determined byreference to expected long-term rates of return. These are intended to reflect historical rates of returnon assets and, where appropriate, current inflation expectations adjusted for consensus economic andinvestment forecasts. The overriding reason for distinguishing longer-term investment returns fromshort-term fluctuations is that the investments are generally held for the longer-term to back longduration insurance contract liabilities and solvency capital rather than for short-term trading purposes.

Furthermore, the income statement recognition of investment appreciation, short-term valuemovements on derivatives, and the charge for the policyholder benefits under IFRS 4 give rise toaccounting mismatches that Prudential believes are not representative of the underlying economicposition.

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Goodwill impairment charges reflect adverse changes in assessment in a given period as to whetherthe excess of the amount paid over the accounting value of acquired assets and liabilities is expected tobe recoverable in the future. It is thus appropriate for such charges to be distinguished from currentperiod operational performance.

Actuarial and other gains and losses on defined benefit pension schemes principally reflectshort-term value movements on scheme assets and the effects of changes in actuarial assumptions.Under the Group’s accounting policies these items are recorded within the income statement, ratherthan through other comprehensive income, solely due to the interaction of the Group’s approach toadoption of IFRS 4 for with-profits funds and the requirements of IAS 19. In analyzing profit beforeshareholder tax the separate identification of these gains and losses is analogous to the more normaltreatment of inclusion as a movement on other comprehensive income, i.e. not within profit for theperiod.

Reconciliation of total profit by business segment and geography to underlying performancemeasure

A reconciliation of profit before all taxes to profit before tax attributable to shareholders and profitfor the year is shown below.

Year Ended December 31,

2007 2006 2005

(In £ Millions)

Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 2,221 2,101Tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . . . . . (19) (849) (1,147)

Profit before tax attributable to shareholders . . . . . . . . . . . . . . . . . . . . . . 1,166 1,372 954Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (401) (1,241) (1,389)Less: tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . . 19 849 1,147Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . . . . . . . . . (382) (392) (242)

Profit from continuing operations after tax . . . . . . . . . . . . . . . . . . . . . . . 784 980 712Discontinued operations (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 (105) 48

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 875 760

A reconciliation of profit from continuing operations before tax attributable to shareholders tooperating profit based on longer-term investment returns is provided below:

Year Ended December 31,

2007 2006 2005

(In £ Millions)

Performance measure: operating profit from continuing operationsbased on long-term investments returns(i) . . . . . . . . . . . . . . . . . . 1,213 1,050 913

Goodwill impairment charge(ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (120)Short-term fluctuations in investment returns on shareholder-backed

business(iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137) 155 211Shareholders’ share of actuarial and other gains and losses on defined

benefit pension schemes(iv) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 167 (50)

Profit from continuing operations before tax attributable toshareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,166 1,372 954

Notes:

(i) Operating profit based on longer-term investment returns

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Operating profit based on longer-term investment returns is a supplemental measure of results. For the purposes of measuringoperating profit, investment returns on shareholder financed business are based on expected long-term rates of return. Theexpected long-term rates of return are intended to reflect historical real rates of return and, where appropriate, currentinflation expectations adjusted for consensus economic and investment forecasts. The significant operations that requireadjustment for the difference between actual and longer-term investment returns are Jackson and certain businesses of theGroup’s Asian operations. The amounts included in operating results for long-term capital returns for debt securities comprisetwo components. These are a risk margin reserve based charge for expected defaults, which is determined by reference tothe credit quality of the portfolio, and amortization of interest-related gains and losses for operating results based onlong-term results to the date when sold bonds would otherwise have matured.

(ii) Goodwill impairment charge

The charge for goodwill impairment in 2005 of £120 million relates to the Japan life insurance business. The charge reflectsthe slower than expected development of the Japanese life insurance business. There was no impairment charge for goodwillin 2007 and 2006.

(iii) Short-term fluctuations in investment returns on shareholder-backed business

Year EndedDecember 31,

2007 2006 2005

(In £ Millions)Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (71) 134 122US operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) 53 56UK insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47) (43) 32Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 11 1

(137) 155 211

(iv) Shareholders’ share of actuarial and other gains and losses on defined benefit pension schemes

Year Ended December 31,

2007 2006 2005

(In £ Millions)Actuarial gains and lossesActual less expected return on scheme assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) 156 544Experience gains (losses) on liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) 18 1Gains (losses) on changes of assumptions for scheme liabilities (based on long-term inflation of

2.8%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 311 (489)295 485 56

Less: amount attributable to the PAC with-profits sub-fund . . . . . . . . . . . . . . . . . . . . . (205) (318) (58)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 167 (2)

Non-recurrent credit (charge)Shareholders’ share of credit arising from reduction in level of assumed future discretionary

increases for the Prudential Staff Pension Scheme (PSPS) for pensions in payment to 2.5% . . — — 35Losses on re-estimation of shareholders’ share of deficits arising from the PSPS(a) . . . . . . . . — — (63)Strengthening in actuarial provisions for increase in ongoing contributions for future service of

active scheme members(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (20)

— — (48)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 167 (50)

(a) Up to December 31, 2004, the deficits arising on the PSPS had been assessed as being 80 per cent attributable to the PACwith-profits fund and 20 per cent to shareholder operations. In 2005, following additional analysis this apportionment wasaltered so that a ratio of 70⁄30 was applied to the PSPS deficit at December 31, 2005. For 2006, the opening deficit of thePSPS scheme has been allocated in the ratios 70⁄30 between the with-profits fund and shareholder-backed operations. Theratio has continued to be applied to movements in the financial position that relate to opening assets and liabilities. However,the service charge and contributions for ongoing service are allocated by reference to the cost allocation for currentbusiness.

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(b) As a result of the April 2005 scheme valuation and subsequent discussions, the contribution levels for future ongoing serviceof active members has doubled. The charge of £20 million in 2005 reflected the actuarial provision for this increase in futureexpenses for certain insurance contracts.

The following tables reconcile ‘‘Operating profit based on longer-term investment returns’’, theGroup’s chosen performance measure, to ‘‘Profit from continuing operations before tax attributable toshareholders’’, the Group’s reported performance within the consolidated IFRS income statement bybusiness segment and geography.

2007

UK US Asia Total

(In £ Millions)

Insurance operations:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521 444 174 1,139Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . (47) (18) (71) (136)Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —

Reported performance: profit before tax attributable to shareholders . . . 474 426 103 1,003Asset management:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 8 72 334Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . 4 1 — 5Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 — — 5

Reported performance: profit before tax attributable to shareholders . . . 263 9 72 344Unallocated corporate:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (260) — — (260)Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . (6) — — (6)Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 — — 85

Reported performance: profit before tax attributable to shareholders . . . (181) (181)Total:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 515 452 246 1,213Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . (49) (17) (71) (137)Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 — — 90

Reported performance: profit from continuing operations before taxattributable to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556 435 175 1,166

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2006

UK US Asia Total

(In £ Millions)

Insurance operations:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 398 175 1,042Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . (43) 53 134 144Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —

Reported performance: profit before tax attributable to shareholders . . . . . 426 451 309 1,186Asset management:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 10 49 261Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . (1) 1 — —Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 — — 22

Reported performance: profit before tax attributable to shareholders . . . . . 223 11 49 283Unallocated corporate:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (253) — — (253)Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . 11 — — 11Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 — — 145

Reported performance: profit before tax attributable to shareholders . . . . . (97) — — (97)Total:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 408 224 1,050Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . (33) 54 134 155Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 — — 167

Reported performance: profit on continuing operations before taxattributable to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552 462 358 1,372

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2005

UK US Asia Total

(In £ Millions)

Insurance operations:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 348 175 923Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . 36 178 32 246Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) — 3 (17)

Reported performance: profit before tax attributable to shareholders . . . . . 416 526 210 1,152Asset management:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163 14 12 189Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . (1) — (8) (9)Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) — — (26)

Reported performance: profit before tax attributable to shareholders . . . . . 136 14 4 154Unallocated corporate:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (199) — — (199)Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (120) — — (120)Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . (26) — — (26)Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) — — (7)

Reported performance: profit before tax attributable to shareholders . . . . . (352) — — (352)Total:Performance measure: operating profit based on longer-term investment

returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 362 187 913Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (120) — — (120)Short-term fluctuations in investment returns . . . . . . . . . . . . . . . . . . . . . 9 178 24 211Shareholders’ share in actuarial and other gains and losses on defined

benefit pension schemes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) — 3 (50)

Reported performance: profit on continuing operations before taxattributable to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 540 214 954

Group operating profit based on longer-term investment returns

Group operating profit based on longer-term investment returns from continuing operations in 2007was £1,213 million which compares with the 2006 operating profit of £1,050 million at the reportedexchange rates (‘‘RER’’) and represents a 20% increase against the 2006 operating profit of£1,008 million when recalculated using constant exchange rates (‘‘CER’’) i.e. with 2006 resultsrecalculated using rates of exchange applicable for the 2007 results. It is the Group’s practice to discusstrends in results on a CER basis to reflect underlying performance in a manner that is unaffected byexchange rate fluctuations. The 2007 operating profit amount includes £19 million of restructuring costs.

Group operating profit based on longer-term investment returns from continuing operations in 2006was £1,050 million compared to the 2005 operating profit of £913 million at RER and represents a 15%increase against the 2005 operating profit of £915 million at CER i.e. with 2005 results recalculatedusing rates of exchange applicable for the 2006 results. The 2006 operating profit amount includes£38 million of restructuring costs.

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Insurance operations

In the United Kingdom, operating profit based on longer-term investment returns increased 11 percent to £521 million in 2007 compared to 2006. This reflects a 7 per cent increase in profits attributableto the with-profits business which contributed £394 million, reflecting strong investment performanceand its impact on terminal bonuses. The net impact of the mortality strengthening and release of othermargins held in other assumptions under the IFRS basis was a positive net £34 million. The resultincludes restructuring costs of £7 million in 2007 and £31 million in 2006 in respect of implementationcosts associated with cost saving initiatives announced in July 2006.

Operating profit based on longer-term investment returns increased 17 per cent to £469 million in2006 compared to 2005. This reflects a 22 per cent increase in profits attributable to the with-profitsbusiness, which contributed £368 million reflecting the strong investment performance of the life-fundand its impact on terminal bonuses. In addition, the result benefited from a £46 million positive impactof changes in FSA reserving requirements for protection and unit-linked products. This was due to theFSA’s relaxation of reserving requirements under the policy statement that effected the proposal inCP 06/16.

In the United States operating profit based on longer-term investment returns in 2007 was£444 million which compares with the 2006 operating profit of £398 million at RER and represents a21% increase against the 2006 operating profit of £367 million at CER. The operating profit primarilyreflects an increase in fee income and continued low mortality rates during 2007. Higher fee income wasdriven primarily by higher separate account assets given the growth in variable annuity sales, and animprovement in the average fees generated from those assets given the increase in election ofguaranteed optional benefits.

Operating profit based on longer-term investment returns in 2006 was £398 million which compareswith the 2005 operating profit of £348 million at RER and represents a 16% increase against the 2005operating profit of £344 million at CER. The increase primarily reflects an increase in fee and spreadincome over 2005. The improved spread income primarily reflects higher net average invested assets.Higher fee income was primarily driven by a 51 per cent increase in separate account assets given thegrowth in variable annuity sales, and an improvement in the average fees generated from those assetsgiven the increase in election of high margin guaranteed optional benefits. Spread income included anumber of items including mortgage prepayment fees, make-whole payments and total return swapincome which together represent £33 million of spread in 2006, compared to £44 million in 2005, bothnet of DAC amortization.

Prudential Corporation Asia’s operating profit based on longer-term investment returns in 2007 was£174 million (including £15 million of development expenses) which compares with the 2006 operatingprofit of £175 million (including £14 million of development expenses) at RER and represents a 6%increase against the 2006 operating profit of £164 million at CER. The established markets (Singapore,Hong Kong and Malaysia) generated £153 million, up 15% from 2006. The North Asia markets (Taiwan,Japan and Korea) generated £16 million, down 20% from 2006 reflecting increased losses in Japan of£16 million. Excluding Japan, profits from North Asia almost doubled reflecting a strong increase inTaiwan of 47% due to in-force profits, especially from long-term health products. Losses from the jointventures in India increased to £43 million, reflecting the fast pace of new business growth andinvestment in growing the branch networks. Losses from the joint venture in China reduced to£6 million. In the other markets (Vietnam, Thailand, Indonesia and the Philippines), profits grew by 58%to £68 million reflecting the expected emergence of IFRS profits and a one-off £16 million favorable itemin Vietnam.

Prudential Corporation Asia’s operating profit based on longer-term investment returns in 2006 was£175 million (including £14 million of development expenses) which compares with the 2005 operatingprofit of £175 million (including £20 million of development expenses) at RER and represents a 3%

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decrease against the 2006 operating profit of £181 million at CER. This reflects the steady profits fromthe established markets of Singapore, Malaysia and Hong Kong with total IFRS operating profits of£139 million, and the increased contributions from Indonesia and Vietnam as they build scale. Four ofPrudential’s life insurance operations in Asia recorded losses in 2006, being China, India and Korea,which are relatively new businesses and are rapidly building scale, plus Thailand, which is marginally lossmaking.

Within the net positive £30 million of exceptional items in 2005 for Prudential Corporation Asia,there was a write-off of DAC of £21 million. No write-off was required in 2006. The profits andrecoverability of DAC in Taiwan are dependent on the rates of return earned and assumed to be earnedon the assets held to cover liabilities and on future investment income and contract cash flows fortraditional whole of life policies If interest rates were to remain at current levels in 2008 then some levelof write-off of DAC may be necessary. However, the amount of the charge currently estimated to be£70-90 million is sensitive to the above mentioned variables.

Prudential Corporation Asia’s development expenses (excluding the regional head office expenses)increased by 33 per cent to £20 million in 2005, compared with £15 million in 2004. Thesedevelopment expenses primarily related to our newer operations and establishing our services hub inMalaysia.

Asset management business

M&G’s operating profit based on longer-term investment returns in 2007 was £254 million whichrepresents a 26% increase against the 2006 operating profit of £202 million. This included £28 million(2006: £27 million) in performance related fees (‘‘PRF’’) and £51 million operating profit from PrudentialCapital (2006: £43 million)

Underlying profits, excluding PRF and Prudential Capital, were £175 million for 2007, an increase of31% compared to 2006. Revenue, excluding PRF and Prudential Capital, increased by 12% to£482 million in 2007. Profit growth was driven by four key factors: an appreciation of underlying assets,positive net sales, an increasing mix of higher-margin business and a decreasing cost/income ratio.

M&G’s operating profit based on longer-term investment returns in 2006 was £202 million, whichrepresents a 24% increase against the 2005 operating profit of £163 million. This included £27 million(2006: £24 million) in PRF and a £2 million (2006: £nil) charge for restructuring costs.

Underlying profits, excluding PRF, were £175 million for 2006, an increase of 26 per cent comparedto the previous year. M&G delivered significant profit growth during 2006 on the back of rising marketlevels, strong net inflows and continued business diversification. PRF increased by 13 per cent over2005, totaling £27 million for 2006, of which £5m was earned by Prudential Capital

In the past few years, growth in income from M&G’s existing businesses has been reinforced by thesuccessful revenue streams from new activities. These include Prudential Capital (formerly PrudentialFinance), which manages Prudential’s balance sheet for profit, private finance, including CDOs, andPrudential Property Investment Managers (‘‘PruPIM’’), which increasingly manages assets for externalinvestors. In its retail businesses, sales of equity funds have risen significantly in both the UnitedKingdom, as a result of strong investment performance, and overseas, where M&G continues to buildnew distribution channels in selected European and other markets.

In the United States operating profit based on longer-term investment returns for asset managementin 2007 was £8 million which compares with the 2006 operating profit of £10 million at RER andrepresents an 11% decrease against the 2006 operating profit of £9 million at CER. PPMA recordedprofits of £4 million in 2007, down from £10 million in 2006 at CER primarily due to lower investmentincome and performance-related fees, partially offset by asset-driven fee growth. US broker-dealerrecorded profits of £9 million in 2007, up from £6 million in 2006 at CER, as the business continues to

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grow through significant recruiting efforts. Curian recorded losses of £5 million in 2007, down from£7 million in 2006 at CER, as the business continues to build its position in the US retail assetmanagement market.

In the United States operating profit based on longer-term investment returns for asset managementin 2006 was £10 million which compares with the 2005 operating profit of £14 million at RER andrepresents a 29% decrease against the 2006 operating profit of £14 million at CER. The 2005 resulthowever, benefited from a one-off £5 million revaluation of an investment vehicle managed by PPMAmerica (‘‘PPMA’’). Curian recorded losses of £8 million in 2006, down from £10 million in 2005, as thebusiness continues to build scale. Curian’s assets under management grew from $1.7 billion(£973 million) in 2005 to $2.4 billion (£1,242 million) at year-end 2006.

Operating profit based on longer-term investment returns from Asian fund management operationsincreased by 308 per cent to £49 million in 2006 compared to 2005. This increase is driven by strongcontributions from the established markets of Singapore and Hong Kong and also reflects the strengthsof the Asia fund management’s geographic and product diversification. Additionally, the 2005 operatingprofit based on longer-term investment returns included a negative £16 million of exceptional items.

At the Group level in 2005, profit before tax includes £6 million in profit attributable to realizingvalue created in India when ICICI increased its stake in Prudential’s Indian asset management jointventure from 45 per cent to 51 per cent. This amount is included in short-term fluctuations ininvestment returns but excluded from operating profit based on longer-term investment returns.

Unallocated Corporate

The operating loss based on longer-term investment returns increased by 2.8 per cent in 2007 to£260 million compared to £253 million in 2006. This reflected mainly an increase in head office costsfrom £83 million in 2006 to £117 million in 2007 offset by an increase in investment return from£58 million in 2006 to £86 million in 2007 and a reduction in interest payable on core structuralborrowings from £177 million in 2006 to £168 million in 2007.

The operating loss based on longer-term investment returns increased by 27 per cent in 2006 to£253 million compared to £199 million in 2005. This reflected increased operating expenses from£181 million in 2005 to £329 million in 2006 and an increase of 20 per cent in the amount of interestpayable from £206 million in 2005 to £248 million in 2006. Head office costs (including Prudential’s Asiaregional head office costs of £36 million) were £119 million in 2006, up £19 million compared to 2005.

Liquidity and Capital Resources

Prudential operates a central treasury function, which has overall responsibility for managing theGroup’s capital funding program as well as its central cash and liquidity positions. Prudential arrangesthe financing of each of its subsidiaries primarily by raising external finance either at the Prudentialparent company level (including through finance subsidiaries whose obligations the parent companyguarantees) or at the operating company level.

Group Cash Flow

The Group holding company’s principal cash requirements are the payment of dividends toshareholders, the servicing of debt, the payment of group activity expenses and investment inbusinesses.

The Group holding company received £711 million in cash remittances from business units in 2007,compared with £596 million in 2006. These remittances primarily comprise dividends from business unitsand the prior year’s shareholders’ statutory transfer from the PAC long-term with-profits fund (UK LifeFund).

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After dividends and interest paid, there was a net cash inflow of £372 million in 2007, comparedwith a net inflow of £160 million in 2006.

During 2007, the Group holding company paid £200 million in respect of corporate activities andreceived £40 million in respect of Group relief on taxable losses.

In 2007, the holding company invested £294 million in its business units, of which £149 million wasinvested in Asia and £145 million was invested in its UK insurance operations.

In aggregate, this gave rise to a decrease in operating cash of £82 million, compared to a decreaseof £104 million in 2006.

In 2007, the Group holding company received £527 million (net of expenses) from the disposal ofits Egg Banking operation. As a result, the total holding company cash flow for 2007 was an inflow of£445 million, compared with an outflow of £104 million in 2006.

Liquidity Requirements

Dividend Payments

Total dividends proposed and paid by Prudential were £426 million and £398 million for the yearsended December 31, 2007 and 2006, respectively. The final dividend in respect of the year endedDecember 31, 2007 was £304 million of which £127 million was allocated as scrip dividends. Thedividend will be paid on May 20, 2008.

Debt Service Costs

Debt service costs in respect of core borrowings paid by Prudential in 2007 were £168 million,compared with £177 million for 2006. Of total consolidated borrowings of £6,560 million atDecember 31, 2007, the parent company and finance subsidiaries had core borrowings of £2,367 millionoutstanding, including £248 million of bonds due to mature in 2009. The remaining outstanding coreborrowings are due to mature in more than five years.

Investment in Businesses

In 2007, Prudential invested £149 million into its Asian business compared to £147 million in 2006.In 2007, Asia was a net contributor to the Group holding company cash flow, with a net remittance of£37 million. In 2007, Prudential also invested £145 million into its UK Insurance Operations compared to£172 million in 2006. Depending on the mix of business written and the opportunities available, it isexpected that the UK shareholder-backed business will become a net contributor to the Group holdingcompany cash flow in 2010.

Liquidity Sources

The parent company held cash and short-term investments of £1,456 million and £1,119 million atDecember 31, 2007 and 2006, respectively. The sources of cash in 2007 included dividends, loans andinterest received from operating subsidiaries and proceeds from the sale of Egg Banking plc.

Prudential received £711 million in cash remittances from business units in 2007, compared to£596 million received in 2006. These remittances primarily comprise dividends from business units andthe shareholders’ statutory transfer from the PAC long-term with-profits fund (UK Life Fund) relating toearlier bonus declarations.

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Shareholders’ Statutory Transfer

In 2007, Prudential declared a total surplus of £2.9 billion from Prudential Assurance’s primarywith-profits fund, of which £2.6 billion was added to with-profits policies and £289 million wasdistributed to shareholders. In 2006, Prudential declared total surplus of £2.7 billion from PrudentialAssurance’s primary with-profits fund, of which £2.4 billion was added to with-profits policies and£269 million was distributed to shareholders. Regular bonus rates were increased for Prudence Bondand for personal pensions.

Dividends, Loans and Interest Received from Subsidiaries

Under UK company law, dividends can only be paid if a company has distributable reservessufficient to cover the dividend. In PAC, Prudential’s largest operating subsidiary, distributable reservesare created mainly by the statutory long-term business profit transfer to shareholders that occurs uponthe declaration of bonuses to policyholders of with-profit products, see ‘‘Shareholders’ StatutoryTransfer’’ above. Prudential’s insurance and fund management subsidiaries’ ability to pay dividends andloans to the parent company is restricted by various laws and regulations. Jackson is subject to statelaws that limit the dividends payable to its parent company. Dividends in excess of these limitationsgenerally require approval of the state insurance commissioner.

The table below shows the dividends, loans and other amounts received by the parent companyfrom the principal operating subsidiaries during the year ended December 31, 2007.

Dividends, loansand interestreceived in

2007 2006

(In £ Millions)

UK Insurance Operations (mainly PAC) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264 217M&G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 94US Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 110Asian Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 175

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 711 596

Each of Prudential’s main operations generates sufficient profits to pay dividends to the parent. Theamount of dividends paid by the operations is determined after considering the development, growthand investment requirements of the operating businesses. Prudential does not believe that the legal andregulatory restrictions constitute a material limitation on the ability of businesses to meet theirobligations or pay dividends to the parent company.

Amounts received from UK Insurance Operations included £261 million in 2007 relating to the PACshareholders’ statutory life fund transfer, compared to £217 million in 2006.

Remittances from Asia are derived predominantly from Prudential’s more established operations inSingapore, Hong Kong, Malaysia and Indonesia.

Sale of Businesses

On January 29, 2007, Prudential announced that it had entered into a binding agreement to sell itsholding in Egg to Citi. The sale completed on May 1, 2007, for a cash consideration (net of expenses) of£527 million.

On November 9, 2007, Prudential announced that it had completed the sale of PPM Capital, itsdirect private equity business.

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Shareholders’ Borrowings and Financial Flexibility

Core structural borrowings of shareholder-financed operations at December 31, 2007 totaled£2,492 million, compared with £2,612 million at the end of 2006. This decrease reflected the repaymentof £150 million long-term borrowings upon maturity, exchange conversion losses of £16 million andother negative adjustments of £14 million.

After adjusting for holding company cash and short-term investments of £1,456 million, net corestructural borrowings at December 31, 2007 were £1,036 million compared with £1,493 million atDecember 31, 2006. This reflects the net cash inflow of £445 million (including £527 million netproceeds from the sale of Egg), exchange conversion gains of £49 million and other negativeadjustments of £37 million.

Core structural borrowings at December 31, 2007 included £1,473 million at fixed rates of interestwith maturity dates ranging from 2009 to perpetuity. Of the core borrowings, £888 million weredenominated in US dollars, to hedge partially the currency exposure arising from the Group’s investmentin Jackson.

Prudential has in place an unlimited global commercial paper programme. At December 31, 2007,commercial paper of £320 million, US$3,479 million and e483 million has been issued under thisprogramme. Prudential also has in place a £5,000 million medium-term note (MTN) programme. AtDecember 31, 2007, subordinated debt outstanding under this programme was £435 million ande520 million, and senior debt outstanding was e65 million and US$12 million. In addition, the holdingcompany has access to £1,600 million committed revolving credit facilities, provided in equal tranches of£100 million by 16 major international banks, renewable in December 2009, and an annually renewable£500 million committed securities lending liquidity facility. These facilities have not been drawn onduring the year. The commercial paper programme, the MTN programme, the committed revolving creditfacilities and the committed securities lending liquidity facility are available for general corporatepurposes and to support the liquidity needs of the parent company.

Prudential plc enjoys strong debt ratings from Moody’s, Standard & Poor’s and Fitch. Prudentiallong-term senior debt is rated A2 (stable outlook), A+ (stable outlook) and AA- (stable outlook) fromMoody’s, Standard & Poor’s and Fitch respectively, while short-term ratings are P-1, A-1 and F1+.

Securities lending and reverse repurchase agreements

The Group has entered into securities lending (including repurchase agreements) whereby blocks ofsecurities are loaned to third parties, primarily major brokerage firms. The amounts above the fair valueof the loaned securities required to be held as collateral by the agreements depend on the quality of thecollateral, calculated on a daily basis. The loaned securities are not removed from the Group’sconsolidated balance sheet, rather they are retained within the appropriate investment classification.Collateral typically consists of cash, debt securities, equity securities and letters of credit. AtDecember 31, 2007, the Group had lent £17,172 million (2006: £11,418 million) (of which£11,461 million (2006: £7,592 million) was lent by the PAC with-profits fund) of securities and heldcollateral under such agreements of £18,125 million (2006: £11,814 million) (of which £12,105 million(2006: £7,934 million) was held by the PAC with-profits fund).

At December 31, 2007, the Group had entered into reverse repurchase transactions under which itpurchased securities and had taken on the obligation to resell the securities for the purchase price of£1,361 million (2006: £1,435 million), together with accrued interest.

Collateral and pledges under derivative transactions

At December 31, 2007, the Group had pledged £260 million (2006: £263 million) for liabilities andheld collateral of £292 million (2006: £212 million) in respect of over-the-counter derivative transactions.

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Securitization

At December 31, 2006, Egg had an outstanding balance of UK credit card receivables in its trustvehicle, Arch (Term) Limited, created in 2002 for the purpose of asset-backed securitization, of£2.8 billion. The asset-backed note holders had a proportional interest in each account balance in thetrust. As at December 31, 2006, the value of this interest was £2.3 billion. This securitization did notqualify for derecognition under IAS 39 and the total portfolio was, therefore, included in loans andreceivables. The funding giving rise to the note-holders’ interest was included in operational borrowingsattributable to shareholder-financed operations. Following the disposal of Egg, the Group no longerholds these balances.

Insurance Groups Directive

As at December 31, 2007, Prudential met the requirements of the Insurance Groups Directive(‘‘IGD’’). The Insurance Groups Directive is discussed in greater detail in Item 4, ‘‘Information on theCompany—UK Supervision and Regulation’’.

Derivative Financial Instruments and Commitments

During the normal course of business Prudential enters into various arrangements in order toincrease liquidity and decrease certain risks. These have included a variety of exchange traded andover-the-counter derivative financial instruments, including futures, options, forward currency contractsand swaps, such as interest rate swaps, cross-currency swaps, swaptions and credit default swaps.

All over-the-counter derivative transactions are conducted under standardized ISDA (InternationalSwaps and Derivatives Association Inc) master agreements and Prudential has collateral agreementsbetween the individual group entities and relevant counterparties in place under each of these marketmaster agreements.

These derivatives are used for efficient portfolio management to obtain cost effective and efficientexposure to various markets in accordance with Prudential’s investment strategies and to manageexposure to interest rate, currency, credit and other business risks.

The UK insurance operations use various currency derivatives in order to limit volatility due toforeign currency exchange rate fluctuations arising on securities denominated in currencies other thansterling. In addition, total return swaps and interest rate swaps are held for efficient portfoliomanagement.

As part of the efficient portfolio management of the PAC with-profits fund, the fund may, from timeto time, invest in cash-settled forward contracts over Prudential plc shares, which are accounted forconsistently with the other derivatives. This is in order to avoid a mismatch of the with-profitsinvestments portfolio with the investment benchmarks set for its equity-based investment funds. Thecontracts will form part of the long-term investments of the with-profits fund. These contracts aresubject to a number of limitations for legal and regulatory reasons.

Some of Prudential’s products, especially those sold in the United States, have certain featureslinked to equity indices. A mismatch between product liabilities and the performance of the underlyingassets exposes the group to equity index risk. In order to mitigate this risk, the relevant business unitspurchase swaptions, equity options and futures to match asset performance with liabilities under equity-indexed products.

Jackson and some of the UK operations hold large amounts of interest-rate sensitive investmentsthat contain credit risks on which a certain level of default is expected. These entities have purchasedswaptions in order to manage the default risk on certain underlying assets to reduce the amount ofregulatory capital held to support the assets.

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Jackson uses the following types of derivatives:

• interest rate swaps which generally involve the exchange of fixed and floating payments over thelife of the agreement without an exchange of the underlying principal amount. These agreementsare used for hedging purposes;

• forwards which consist of interest spreadlock agreements, in which Jackson locks in the forwardinterest rate differential between a swap and the corresponding US Treasury security. Theforwards are held as a hedge of corporate spreads;

• put-swaption contracts which provide the purchaser with the right, but not the obligation, torequire the writer to pay the present value of a long-duration interest rate swap at future exercisedates. Jackson purchases and writes put-swaptions with maturities up to 10 years. On a net basis,put-swaptions hedge against significant upward movements in interest rates;

• equity index futures contracts and equity index call and put options which are used to hedgeJackson’s obligations associated with its issuance of fixed indexed immediate and deferredannuities and certain variable annuity guarantees. These annuities and guarantees containembedded options which are fair valued for financial reporting purposes;

• total return swaps in which Jackson receives equity returns or returns based on reference poolsof assets in exchange for short-term floating rate payments based on notional amounts, are heldfor both hedging and investment purposes;

• cross-currency swaps, which embody spot and forward currency swaps and additionally, in somecases, interest rate swaps and equity index swaps, are entered into for the purpose of hedgingJackson’s foreign currency denominated funding agreements supporting trust instrumentobligations;

• spread cap options which are used as a macro-economic hedge against declining interest rates.Jackson receives quarterly settlements based on the spread between the two-year and the10-year constant maturity swap rates in excess of a specified spread; and

• credit default swaps, which represent agreements under which Jackson has purchased defaultprotection on certain underlying corporate bonds held in its portfolio. These contracts allowJackson to sell the protected bonds at par value to the counterparty in the event of their defaultin exchange for periodic payments made by Jackson for the life of the agreement.

Jackson has unfunded commitments of £181 million and £104 million related to its investments inlimited partnerships and commercial mortgage loans, respectively, at December 31, 2007. These reflecton demand contractual commitments to fund further investments.

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Contractual Obligations

Contractual obligations with specified payment dates at December 31, 2007 were as follows:

Less than More thanTotal 1 year 1-3 years 3-5 years 5 years

£m £m £m £m £m

Policyholder liabilities(a) . . . . . . . . . . . . . . . . 365,239 16,883 32,944 33,742 281,670Long-term debt . . . . . . . . . . . . . . . . . . . . . 6,560 2,721 333 198 3,308Capital lease obligations . . . . . . . . . . . . . . . . 102 5 22 — 75Operating lease obligations . . . . . . . . . . . . . . 275 38 92 34 111Purchase obligations(b) . . . . . . . . . . . . . . . . . 349 349 — —Obligations under funding, securities lending

and sale and repurchase agreements . . . . . . 4,081 4,081 — — —Other long-term liabilities(c) . . . . . . . . . . . . . . 4,011 3,707 210 94 —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380,617 27,784 33,601 34,068 285,164

Reconciliation to balance sheet: . . . . . . . . £m £mTotal contractual obligations per above . . . . . . 380,617Difference between policyholder liabilities per

above (based on undiscounted cash flows)and total policyholder liabilities andunallocated surplus of with-profits funds perbalance sheet:Total policyholder liabilities and unallocated

surplus of with-profits funds per balancesheet . . . . . . . . . . . . . . . . . . . . . . . . . 190,569

Policyholder liabilities (undiscounted) perabove . . . . . . . . . . . . . . . . . . . . . . . . . (365,239) (174,670)

Other short-term/non-contractual obligations:Current tax liabilities . . . . . . . . . . . . . . . . 1,237Deferred tax liabilities . . . . . . . . . . . . . . . . 3,475Accruals and deferred income . . . . . . . . . . 599Other creditors (excluding capital and

operating lease obligations and purchaseobligations) . . . . . . . . . . . . . . . . . . . . . 1,020

Other liabilities . . . . . . . . . . . . . . . . . . . . 1,871 8,202

Other items . . . . . . . . . . . . . . . . . . . . . . . . (708)

Total liabilities per balance sheet . . . . . . . . . . 213,441

(a) Amounts shown in respect of policyholder liabilities represent estimated undiscounted cash flows for the Group’s lifeassurance contracts. In determining the projected payments, account has been taken of the contract features, in particularthat the amount and timing of policyholder benefit payments reflect either surrender, death, or contract maturity. In addition,the undiscounted amounts shown include the expected payments based on assumed future investment returns on assetsbacking policyholder liabilities. The projected cash flows exclude the unallocated surplus of with-profits funds. AtDecember 31, 2007, on the IFRS basis of reporting the unallocated surplus was £14,351 million. The unallocated surplusrepresents the excess of assets over liabilities, including policyholder ‘‘asset share’’ liabilities, which reflect the amountpayable under the realistic Peak 2 reporting regime of the FSA. Although accounted for as a liability, as permitted by IFRS 4,there is currently no expected payment date for the unallocated surplus.

(b) Comprising unfunded commitments for investments in limited partnerships of £181 million, unfunded commitments related tomortgage loans of £104 million and commitments to purchase and develop investment properties of £64 million.

(c) Amounts due in less than one year include amounts attributable to unit holders of consolidated unit trusts and similar fundsof £3,556 million.

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Operating Businesses

UK Life Insurance

The liquidity sources for Prudential’s UK life insurance businesses comprise premiums, deposits andcharges on policies, investment income, proceeds from the sale and maturity of investments, externalborrowings and capital contributions from the parent company. The liquidity requirements comprisebenefits and claims, operating expenses, interest on debt, purchases of investments and dividends to theparent company.

The liquidity requirements of Prudential’s UK life insurance businesses are regularly monitored tomatch anticipated cash inflows with cash requirements. Cash needs are forecast and projected sourcesand uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying theseprojections are reviewed periodically. Adjustments are made periodically to the investment policies withrespect to, among other things, the maturity and risk characteristics of the investment assets to reflectchanges in the business’ cash needs and also to reflect the changing competitive and economicenvironment.

The liquidity of Prudential’s UK insurance operations is affected by the payment of guaranteedbenefits and terminal bonuses on maturing and surrendering policies by the UK insurance operations. Inaddition, the non-cash bonus declaration to policyholders results in a cash transfer to shareholders’funds. A large proportion of Prudential’s liabilities contains discretionary surrender values or surrendercharges. In addition, pension annuity policies cannot be surrendered by the policyholder.

At December 31, 2007 and 2006, Prudential Assurance’s long-term fund assets in excess of itscapital requirements were £26,866 million and £24,002 million, respectively. The ‘‘with-profits insurancecapital component’’ of the enhanced capital requirement, at December 31, 2007, amounted to£16,369 million (2006: £15,042 million).

M&G

The principal liquidity source for M&G is fee income for managing retail, institutional and theinternal investment funds of Prudential’s UK operations. The principal liquidity requirements are foroperating expenses and to facilitate the investment activities of Prudential Capital as referred to in noteE2 to the consolidated financial statements. Amounts are distributed to the parent company afterconsidering capital requirements. Capital requirements are driven by the regulatory stipulations based onfixed operating expenses and other operating considerations. At December 31, 2007, M&G met therelevant regulatory requirements.

US Life Insurance

The liquidity sources for Jackson are its cash, short-term investments and publicly traded bonds,premium income, deposits received on certain annuity and institutional products, investment income,reverse repurchase agreements, utilization of a short-term borrowing facility with the Federal Home LoanBank of Indianapolis and capital contributions from the parent company.

Liquidity requirements are principally for purchases of new investments and businesses, repaymentof principal and interest on intercompany debt, payments of interest on surplus notes, funding ofinsurance product liabilities, including payments for policy benefits, surrenders, maturities and newpolicy loans and funding of expenses, including payment of commissions, operating expenses and taxes.At December 31, 2007, Jackson’s outstanding notes and bank debt included:

• $250 million of short-term notes maturing in 2008,

• $17.4 million of collateralized loans maturing in 2008,

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• a $32 million unsecured cash advance from Prudential due in 2008,

• $4 million of non-investment grade debt issued by variable interest entities maturing by 2013,

• $250 million of surplus notes maturing in 2027.

Significant increases in interest rates and disintermediation can create sudden increases in surrenderand withdrawal requests by policyholders and contract holders. Other factors that are not directlyrelated to interest rates can also give rise to disintermediation risk, including but not limited to changesin ratings from rating agencies, general policyholder concerns relating to the life insurance industry(e.g., the unexpected default of a large, unrelated life insurer) and competition from other products,including non-insurance products such as mutual funds, certificates of deposit and newly developedinvestment products. Most of the life insurance, annuity and institutional products Jackson offers permitthe policyholder or contract holder to withdraw or borrow funds or surrender cash values, althoughsome include policy restrictions such as surrender charges and market value adjustments to discourageearly withdrawal of policy and contract funds. At December 31, 2007, approximately $10.3 billion ofpolicy and contract funds had no surrender charge or market value adjustment restrictions.

Jackson uses a variety of asset-liability management techniques to provide for the orderly provisionof cash flow from investments and other sources as policies and contracts mature in accordance withtheir normal terms. Jackson’s principal sources of liquidity to meet unexpected cash outflows associatedwith sudden and severe increases in surrenders and withdrawals are its portfolio of liquid assets and itsnet operating cash flows. At December 31, 2007, the portfolio of cash, short-term investments andpublicly traded bonds and equities amounted to $29.4 billion. Operating net cash inflows for Jackson in2007 were $1.9 billion. Prudential believes that these liquidity sources are sufficient to satisfy thecompany’s liquidity needs.

At December 31, 2007, the statutory capital and surplus of Jackson was $4.0 billion, which was inexcess of the requirements set out under Michigan insurance law. As described in Item 4, ‘‘Informationon the Company—Supervision and Regulation of Prudential—US Supervision and Regulation’’, Jackson isalso subject to risk-based capital guidelines that provide a method to measure the adjusted capital that alife insurance company should have for regulatory purposes, taking into account the risk characteristicsof the Company’s investments and products. At December 31, 2007, Jackson’s total risk based capitalratio under the National Association of Insurance Commissioners’ definition exceeded model actstandards.

Asia Life Insurance

The liquidity sources for Prudential’s Asia life insurance businesses comprise premiums, depositsand charges on policies, investment income, proceeds from the sale and maturity of investments,external borrowings and capital contributions from the parent company. The liquidity requirementscomprise benefits and claims, operating expenses, interest on debt, purchases of investments anddividends to the parent company.

The liquidity requirements of Prudential’s Asia life insurance businesses are regularly monitored tomatch anticipated cash inflows with cash requirements. Cash needs are forecast and projected sourcesand uses of funds, as well as the asset, liability, investment and cash flow assumptions underlying theseprojections are reviewed periodically. Adjustments are made periodically to the investment policies withrespect to, among other things, the maturity and risk characteristics of the investment assets to reflectchanges in the business cash needs and also to reflect the changing competitive and economicenvironment.

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Group Consolidated Cash Flows on an IFRS Basis

The discussion that follows is based on the consolidated statement of cash flows prepared underIFRS and presented in Item 18 of this Form 20-F.

Net cash inflows (outflows) in 2007 were £1,138 million from operating activities, £(719) millionfrom investing activities, and £(579) million from financing activities. In 2006, net cash inflows (outflows)were £2,209 million from operating activities, £(102) million from investing activities, and £(522) millionfrom financing activities. In 2005, net cash inflows (outflows) were £(199) million from operatingactivities, £30 million from investing activities, and £(678) million from financing activities.

The Group held cash and cash equivalents of £4,951 million at December 31, 2007 compared with£5,071 million and £3,586 million at December 31, 2006 and 2005, respectively.

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Item 6. Directors, Senior Management and Employees

The Prudential Board of directors consists of 15 directors following the conclusion of the AnnualGeneral Meeting that was held on May 15, 2008. Since January 2007, the following Board changes havetaken place: Roberto Mendoza ceased to be a director on May 17, 2007. Sir Winfried Bischoff and AnnGodbehere were appointed as directors on August 2, 2007 and Tidjane Thiam was appointed as adirector on March 25, 2008. Philip Broadley ceased to be Group Finance Director with effect fromMarch 25, 2008, but remained on the Board as an executive director until the conclusion of the AnnualGeneral Meeting on May 15, 2008.

Set forth below are the names, ages, positions, business experience and principal business activitiesperformed by the current directors of Prudential, as well as the dates of their initial appointment asdirectors. Ages given are as at March 31, 2008.

Sir David Clementi FCA MBA (Age 59)Chairman and Chairman of the Nomination Committee

Sir David Clementi has been Chairman of Prudential since December 2002. In 2005, Sir David wasappointed as President of the Investment Property Forum. In 2003, he joined the Financial ServicesAuthority’s Financial Capability Steering Group, and was appointed by the Secretary of State forConstitutional Affairs to carry out a review of the regulation of legal services in England and Wales,which was completed in 2004. Since 2003, he has been a non-executive director of Rio Tinto plc. Inaddition, Sir David is a Trustee of the Royal Opera House, and with effect from May 23, 2008, he willalso be a non-executive director of Foreign & Colonial Investment Trust PLC. From 1997 to 2002, he wasDeputy Governor of the Bank of England. During this time, he served as a member of the MonetaryPolicy Committee and as a non-executive director of the Financial Services Authority. From 1975 to1997, he worked for the Kleinwort Benson Group, latterly as Chief Executive.

Mark Tucker ACA (Age 50)Group Chief Executive

Mark Tucker was re-appointed as an executive director in May 2005, when he also became GroupChief Executive. From May 2004 to March 2005 he was Group Finance Director, HBOS plc and directorof Halifax plc. Previously, Mark was an executive director of Prudential from 1999 to 2003, and from1993 to 2003 he was Chief Executive of Prudential Corporation Asia, and also held senior positions inPrudential’s businesses in the UK and US. Mark first joined Prudential in 1986, having previously been atax consultant at PriceWaterhouse UK in London.

Tidjane Thiam (Age 45)Chief Financial Officer

Tidjane Thiam has been an executive director of Prudential and Chief Financial Officer sinceMarch 25, 2008. He was previously Chief Executive Officer, Europe at Aviva, where he also heldsuccessively the positions of Group Strategy and Development Director and Managing Director, AvivaInternational. Prior to that, Tidjane was a partner with McKinsey & Company in France and one of theleaders of their Financial Institutions practice, focusing on insurance companies and banks. Earlier in hiscareer, he spent a number of years in Africa where he was Chief Executive and then Chairman of theNational Bureau for Technical Studies and Development in Cote d’Ivoire and a cabinet member asMinister of Planning and Development. He is a non-executive director of Arkema in France, a member ofthe Council of the Overseas Development Institute (ODI) in London and a sponsor of OpportunityInternational, a charity focusing on microfinance in developing countries.

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Clark Manning FSA MAAA (Age 49)Executive director

Clark Manning has been an executive director of Prudential since January 2002. He is also Presidentand Chief Executive Officer of Jackson National Life. He was previously Chief Operating Officer, SeniorVice President and Chief Actuary of Jackson National Life, which he joined in 1995. Prior to that, he wasSenior Vice President and Chief Actuary for SunAmerica Inc, and prior to that Consulting Actuary atMilliman & Robertson Inc. Clark has more than 25 years’ experience in the life insurance industry, andholds both a bachelor’s degree in actuarial science and an MBA from the University of Texas. He alsoholds professional designations of Fellow of the Society of Actuaries (FSA) and Member of the AmericanAcademy of Actuaries (MAAA).

Michael McLintock (Age 47)Executive director

Michael McLintock has been an executive director of Prudential since September 2000. He is alsoChief Executive of M&G, a position he held at the time of M&G’s acquisition by Prudential in 1999.Michael joined M&G in 1992. He is also a non-executive director of Close Brothers Group plc.

Nick Prettejohn (Age 47)Executive director

Nick Prettejohn has been an executive director of Prudential and Chief Executive, Prudential UKand Europe since January 2006. He is also a board member of the ABI, Chairman of the FinancialServices Practitioner Panel (having previously been Deputy Chairman), and a board member of the RoyalOpera House. Previously, he was Chief Executive of Lloyd’s of London from 1999 until 2005. Nick joinedthe Corporation of Lloyd’s in 1995 as Head of Strategy, and played a key role in the Reconstruction andRenewal process, which reorganized Lloyd’s after the losses of the late 1980s and early 1990s. Followingthe successful completion of the reorganization in 1996, he became Managing Director of Lloyd’sBusiness Development Unit and in 1998 he also assumed responsibility for Lloyd’s North Americabusiness unit. Prior to his appointment to Lloyd’s, Nick was responsible for corporate strategy at NationalFreight Corporation plc, and prior to that he was a partner at management consultants Bain and Co anda director of private equity company Apax Partners.

Barry Stowe (Age 50)Executive director

Barry Stowe has been an executive director of Prudential since November 2006, and ChiefExecutive, Prudential Corporation Asia since October, 2006. Previously, he was President, Accident &Health Worldwide for AIG Life Companies. He joined AIG in 1995, and prior to that was President andCEO of NISUS, a subsidiary of Pan-American Life, from 1992-1995. Prior to NISUS, Barry spent 12 yearsat Willis Corroon in the US.

Sir Winfried Bischoff (Age 66)Non-executive director

Sir Winfried Bischoff has been a non-executive director of Prudential since August 2, 2007. Sir Winhas been Chairman of Citi Europe and a Member of The Management, Operating and Business HeadsCommittees of Citigroup Inc. since May 2000. He was Acting Chief Executive Officer of Citigroup Inc.from November 5, 2007 to December 11, 2007, when he was appointed Chairman of Citigroup Inc. Inaddition, Sir Win is Chairman of the European Advisory Board of Citigroup Inc., and has been anon-executive director of The McGraw-Hill Companies, New York and of Eli Lilly and Company,Indianapolis since June 2000. Prior to that, Sir Win joined the Company Finance Division of J. Henry

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Schroder & Co. Limited, London, in 1966 and in 1971, he was appointed as Managing Director ofSchroders Asia Limited, Hong Kong. He returned to London in January 1983, and was appointedChairman of J. Henry Schroder & Co. in October 1983. Sir Win was appointed Group Chief Executive ofSchroders plc in December 1984 and as Chairman of Schroders plc in May 1995, until the acquisition ofSchroders, an investment banking business, by Citigroup Inc. in May 2000. In addition, Sir Win was anon-executive director of Cable and Wireless plc from 1991 and Deputy Chairman from 1995 to 2003.His other non-executive directorships included: IFIL Finanziaria di Partecipazioni SpA, Italy (1999-2004),Siemens Holdings Plc (2001-2003), Land Securities (1999-2008) and Akbank T.A.S. (2007-2008).

Keki Dadiseth FCA (Age 62)Non-executive director and member of the Remuneration Committee

Keki Dadiseth has been a non-executive director of Prudential since April 2005. During 2006, hewas appointed as a non-executive director of ICICI Prudential Life Assurance Company Limited and ICICIPrudential Trust Limited. He is also a member of the Advisory Board of Marsh & McLennanCompanies Inc. and an International Advisor to Goldman Sachs. In addition, Keki is a director ofNicholas Piramal Limited, Siemens Limited, Britannia Industries Limited and The Indian Hotels CompanyLimited, all quoted on the Bombay Stock Exchange. He is also a director of the Indian School ofBusiness and acts as a trustee of a number of Indian charities. Before he retired from Unilever in 2005,he was Director, Home and Personal Care, responsible for the HPC business of Unilever worldwide, aBoard member of Unilever PLC and Unilever N.V. and a member of Unilever’s Executive Committee. Hejoined Hindustan Lever Ltd in India in 1973.

Michael Garrett (Age 65)Non-executive director and member of the Remuneration Committee

Michael Garrett has been a non-executive director of Prudential since September 2004. He workedfor Nestle from 1961, becoming Head of Japan (1990 - 1993), and then Zone Director and Member ofthe Executive Board, responsible for Asia and Oceania, and in 1996 his responsibilities were expandedto include Africa and the Middle East. Michael retired as Executive Vice President of Nestle in 2005. Heserved the Government of Australia as Chairman of the Food Industry Council and as a Member of theIndustry Council of Australia, and was also a member of the Advisory Committee for an APEC(Asia-Pacific Economic Cooperation) Food System, a Member of The Turkish Prime Minister’s AdvisoryGroup and the WTO (World Trade Organization) Business Advisory Council in Switzerland. Michaelremains a director of Nestle in India and was appointed Chairman of the Evian Group in 2001, a thinktank and forum for dialogue promoting free trade. He also serves as a non-executive director on theboards of the Bobst Group Switzerland and Hasbro Inc. in the USA and Gottex Fund ManagementHoldings Limited in Guernsey. In addition he is a member of the Finance and Performance ReviewCommittee of The Prince of Wales International Business Leaders Forum (IBLF), as well as a Member ofthe Swaziland International Business Advisory Panel under the auspices of the Global LeadershipFoundation (GLF) London.

Ann Godbehere FCGA (Age 52)Non-executive director and member of the Audit Committee

Ann Godbehere has been a non-executive director of Prudential since August 2, 2007, and hasbeen a member of the Audit Committee since October 1, 2007. She began her career in 1976 withSun Life of Canada, joining Mercantile & General Reinsurance Group in 1981, where she held a numberof management roles rising to Senior Vice President and Controller for life and health and property/casualty businesses in North America in 1995. In 1996, Swiss Re acquired Mercantile & GeneralReinsurance Group, and Ann became Chief Financial Officer of Swiss Re Life & Health, North America.In 1997, she was made Chief Executive Officer of Swiss Re Life & Health, Canada. She moved to

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London as Chief Financial Officer of Swiss Re Life & Health Division in 1998 and joined the Property &Casualty Business Group, based out of Zurich, as Chief Financial Officer on its establishment in 2001. In2003, she was appointed Chief Financial Officer of the Swiss Re Group. Ann is also a non-executivedirector of Ariel Holdings Limited, Atrium Underwriting plc and Atrium Underwriting Limited, and ChiefFinancial Officer of Northern Rock.

Bridget Macaskill (Age 59)Non-executive director, Chairman of the Remuneration Committee, and member of theNomination Committee

Bridget Macaskill has been a non-executive director of Prudential since September 2003. Bridgetrejoined the Board of Prudential having previously resigned due to a potential conflict of interest in2001. She has been a member of the Remuneration Committee since 2003 and became Chairman of theRemuneration Committee in May 2006. Bridget is a non-executive director of the Federal NationalMortgage Association (Fannie Mae) and was previously also a non-executive director of Scottish &Newcastle PLC and J Sainsbury Plc. Prior to that she spent 18 years at OppenheimerFunds Inc, a majorNew York based investment management company, the final 10 years of which she was Chief ExecutiveOfficer.

Kathleen O’Donovan ACA (Age 50)Non-executive director and Chairman of the Audit Committee

Kathleen O’Donovan has been a non-executive director of Prudential since May 2003. She has beena member of the Audit Committee since 2003 and became Chairman of the Audit Committee in May2006. Kathleen is a non-executive director and Chairman of the Audit Committees of Great PortlandEstates PLC and Trinity Mirror plc, and a non-executive director of ARM Holdings plc. She is alsoChairman of the Invensys Pension Scheme. Previously, she was a non-executive director and Chairman ofthe Audit Committees of the EMI Group plc and the Court of the Bank of England, and a non-executivedirector of O2 plc. Prior to that, Kathleen was Chief Financial Officer of BTR and Invensys, and beforethat she was a partner at Ernst & Young.

James Ross (Age 69)Senior Independent Non-executive Director and member of the Remuneration and NominationCommittees

James Ross has been a non-executive director since May 2004 and the Senior Independent Directorsince May 2006. He holds non-executive directorships with McGraw Hill in the United States andSchneider Electric in France. He is also Chairman of the Leadership Foundation for Higher Education andof the Liverpool School of Tropical Medicine. James was previously a non-executive director of DatacardInc in the United States, and prior to that Chairman of National Grid plc and Littlewoods plc. He wasalso Chief Executive of Cable and Wireless plc and Chairman and Chief Executive of BP America Inc.,and a Managing Director of the British Petroleum Company plc.

Lord Turnbull KCB CVO (Age 63)Non-executive director and member of the Audit Committee

Lord Turnbull has been a non-executive director of Prudential since May 2006, and a member of theAudit Committee since January 2007. He entered the House of Lords as a Life Peer in 2005. In 2002, hebecame Secretary of the Cabinet and Head of the Home Civil Service until he retired in 2005. Prior tothat, he held a number of positions in the civil service, including Permanent Secretary at HM Treasury;Permanent Secretary at the Department of the Environment (later Environment, Transport and theRegions); Private Secretary (Economics) to the Prime Minister; and Principal Private Secretary toMargaret Thatcher and then John Major. He joined HM Treasury in 1970. Lord Turnbull is a

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non-executive director of Frontier Economics Ltd and The British Land Company PLC, and was formerlya non-executive director of the Arup Group. He also works part-time as a Senior Adviser to the Londonpartners of Booz Allen Hamilton (UK).

The Board has determined, and does so annually, that all of its non-executive directors areindependent under UK governance standards. In addition, the Board affirms annually the independenceof its Audit Committee members under applicable US legislation.

Other Executive Officers

The heads of Prudential’s business units, Prudential UK, M&G, Jackson and Prudential CorporationAsia are also directors of Prudential, as set forth above. For information relating to the compensationpaid or accrued to all Prudential directors see below.

Service Contracts

Chairman’s letter of appointment and benefits

The Chairman, Sir David Clementi, is paid an annual fee and has a contractual notice period of12 months by either party. The Chairman participates in a medical insurance scheme, has life assurancecover of four times his annual fees in lieu of death in service and has the use of a car and driver. He isentitled to a supplement to his fees, intended for pension purposes. He is not a member of any Grouppension scheme providing retirement benefits. His annualized fee as at January 1, 2008 is £520,000 andhis pension allowance is 25% of his fees.

Directors’ service contracts and letters of appointment

Executive directors have contracts that terminate on their normal retirement date. Following thenew Age Discrimination legislation in the UK, the normal retirement date for the executive directorsexcept Clark Manning was changed to the date of their 65th birthday. The normal retirement date forClark Manning is the date of his 60th birthday.

The normal notice of termination the Company is required to give executive directors is 12 months.Accordingly, in normal circumstances the director would be entitled to one year’s salary and benefits inrespect of the notice period on termination. Additionally, outstanding awards under annual andlong-term incentive plans will vest depending on the circumstances and according to the rules of theplans. When considering any termination of a service contract, the Remuneration Committee will haveregard to the specific circumstances of each case, including a director’s obligation to mitigate his loss.

The contract for Clark Manning is a renewable one-year fixed-term contract. The contract isrenewable automatically upon the same terms and conditions unless the Company or Clark Manninggives at least 90 days’ notice prior to the end of the relevant term. In the case of the former, ClarkManning would be entitled to continued payment of salary and benefits for the period of one year fromthe day such notice is delivered to him. Payments of Clark Manning’s salary during the period followingthe termination of employment would be reduced by the amount of compensation earned by him fromany subsequent employer or from any person for whom he performs services. Benefits to be providedduring such period would also be cancelled to the extent that comparable benefits were available to himfrom these alternative sources.

Non-executive directors do not have service contacts but are appointed pursuant to letters ofappointment with notice periods of six months without liability for compensation.

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Tidjane Thiam

Tidjane Thiam joined Prudential on March 25, 2008 as Chief Financial Officer and a member of theBoard.

Tidjane Thiam’s remuneration is set out in the following table:

Group PerformanceAnnual Incentive Plan Share Plan

Director Role Annual Salary Maximum Maximum

Tidjane Thiam . . . . . . Chief Financial Officer £650,000 110% 160%

His benefits are a non-pensionable allowance of £10,000 per annum, in lieu of a company carallowance, medical insurance for himself and his family and the use of a car and driver. Additionally asalary supplement for pension purposes of 25 per cent of his salary and life assurance of four times hisannual salary on death in service are provided.

In order to compensate him for the loss of his 2007 bonus, it was necessary to provide TidjaneThiam with a cash payment of £325,000 on joining and an award of shares to be deferred for threeyears with a value of £325,000.

A guarantee has also been provided that his bonus for 2008 will not be less than 100% of hissalary. Any amount of bonus paid which is greater than 50% of his salary will be awarded in shareswhich are deferred for three years. Under the current remuneration policy, an award of 160% of hissalary will be made under the Group Performance Share Plan (‘‘GPSP’’). For 2008, in recognition of hisappointment he will be made a double award under the GPSP totaling 320% of his annual salary.

In order to compensate for the loss of outstanding deferred share awards under annual incentiveplans and long term awards with his previous employer, Tidjane Thiam received cash sums totaling£650,631 and restricted share awards over a total of 196,111 shares with the awards vesting in March2009 and 2010.

Philip Broadley

Philip Broadley resigned in 2007. In view of his flexibility in agreeing a leaving date after the 2008Annual General Meeting and for his agreement to act as a consultant for six months following hisleaving date, the Remuneration Committee agreed the following:

• a total payment of £507,105 to be paid in two tranches in June and December 2008;

• medical insurance and life assurance cover for six months after his leaving date;

• treatment as a ‘‘good leaver’’ in respect of his outstanding share awards. The deferred shareawards under his 2006 and 2007 annual incentive plans were released on his leaving and hisoutstanding long term incentive awards will vest according to the rules of the plans in the sameway as other recipients of awards, but pro-rated where appropriate for the time he worked duringthe performance period.

All of the above payments after June 2008 are subject to his continuing to be available forconsultancy for six months after his leaving date and subject to his compliance with non-solicitation andconfidentiality conditions.

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Compensation

In 2007 the aggregate compensation that Prudential paid or accrued to all Prudential executivedirectors was £13,122,128 including performance related bonuses paid to executive directors andexecutive officers and an aggregate pension contribution of £1,163,687 and provision for futurebenefits.

RemunerationValue ofreleases

from LTIPs inrespect of

performanceCash periods

supplements Total endingSalary/ for pension Emoluments 31 December

Fees Bonus Benefits* purposes** 2007 2007****

£000 £000 £000 £000 £000

ChairmanSir David Clementi . . . . . . . . . . . 508 — 41 127 676

Executive directorsPhilip Broadley . . . . . . . . . . . . . 567 590 56 153 1,366 814Clark Manning(1,2) . . . . . . . . . . . 500 1,724 16 — 2,240 2,933Michael McLintock(3) . . . . . . . . . 320 1,780 48 — 2,148 1,280Nick Prettejohn(4) . . . . . . . . . . . 615 615 54 80 1,364 —Barry Stowe(5,6) . . . . . . . . . . . . . 500 500 140 125 1,265 —Mark Tucker(7) . . . . . . . . . . . . . 907 1,134 59 227 2,327 1,588

Total executive directors . . . . . 3,409 6,343 373 585 10,710 6,615

Non-executive directorsSir Winfried Bischoff (from

August 2, 2007) . . . . . . . . . . . 25 25Keki Dadiseth(8) . . . . . . . . . . . . . 81 81Michael Garrett . . . . . . . . . . . . . 66 66Ann Godbehere (from August 2,

2007) . . . . . . . . . . . . . . . . . 29 29Bridget Macaskill . . . . . . . . . . . . 79 79Roberto Mendoza (until

May 17,2007) . . . . . . . . . . . . 24 24Kathleen O’Donovan . . . . . . . . . 98 98James Ross . . . . . . . . . . . . . . . 98 98Lord Turnbull . . . . . . . . . . . . . . 73 73

Total non-executive directors . . 573 573

Overall total . . . . . . . . . . . . . . . 4,490 6,343 414 712 11,959 6,615

* Benefits include, where provided, cash allowances for cars, the use of a car and driver, medical insurance, securityarrangements and expatriate benefits.

** Pension supplements that are paid in cash are included in the table. The policy on pensions is described in the section onPensions arrangements on page 166. The pension arrangements for current executive directors are described in the sectionon Directors’ pensions and life assurance on page 175.

*** Value of LTIP releases is the total of cash paid plus, for shares released, the value of the released shares based on the shareprice at December 31, 2007. All executive directors participate in long-term incentive plans and the details of releases forawards with a performance period ending December 31, 2007 are provided in the footnotes to the table on share awards onpages 174 to 175. Executive directors’ participation in all-employee plans are detailed on page 166.

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Notes:

1. A deferred share award from his 2007 annual bonus valued at $200,000 was made to Clark Manning. This is included in the2007 bonus figure.

2. Clark Manning’s bonus figure excludes a contribution of £6,745 from a profit sharing plan, which has been made into a 401kretirement plan. This is included in the table on pension contributions on page 176.

3. Michael McLintock’s 2007 annual incentive contains a deferral element as described in the section on ‘‘Michael McLintockremuneration arrangements’’ on page 167. A deferred share award from his 2007 annual bonus valued at £640,000 wasmade to Michael McLintock. This is included in the 2007 bonus figure.

4. A deferred share award from his 2007 annual bonus valued at £307,625 was made to Nick Prettejohn. This is included in the2007 bonus figure.

5. A deferred share award from his 2007 annual bonus valued at £250,000 was made to Barry Stowe. This is included in the2007 bonus figure.

6. Barry Stowe’s benefits include those relating to his expatriate status including costs of £88,288 related to housing.

7. A deferred share award from his 2007 annual bonus valued at £453,600 was made to Mark Tucker. This is included in the2007 bonus figure.

8. Keki Dadiseth was paid allowances totaling £9,400 in 2007 in respect of his accommodation expenses in London whilst onthe Company’s business, in lieu of reimbursing hotel costs as is the usual practice for directors who are not resident in theUK.

Executive director remuneration

Total remuneration levels for executive directors are set by reference to the levels in their relevantmarkets and all pay data is externally provided.

The structure for the remuneration of Prudential’s Group Chief Executive and executive directorshave not changed between 2007 and 2008, except in the case of Michael McLintock whose newarrangements are described in detail on page 167. The following table summarizing the structureincludes the salaries of the executive directors from January 1, 2008 for information.

Long Term Incentives

BusinessAnnual Group Unit

Incentive Performance PerformancePlan Share Plan PlanAnnual Salary from

Director Role January 1, 2008 Maximum Maximum Maximum

Philip Broadley . . . . . . Group Finance £567,100 110% 160% n/aDirector

Clark Manning(1) . . . . . Jackson President & $1,050,000 c320% 230% 230%CEO

Michael McLintock(2) . . . Chief Executive M&G £320,000 —(2) 100% —(2)

Nick Prettejohn . . . . . . CEO UK £650,000 110% 130% 130%Barry Stowe . . . . . . . . CEO Asia £550,000 110% 130% 130%Mark Tucker . . . . . . . . Group Chief £975,000 125% 200% n/a

Executive

Notes:

(1) In addition to the Annual Bonus Plan, Clark Manning participates in a 10% share of a senior management bonus pool basedon the profits of Jackson. Clark Manning’s annual bonus figure includes a notional figure for his participation in the seniormanagement bonus pool reflecting exceptional performance.

(2) The details for Michael McLintock’s new arrangements are set out in the section on ‘‘Michael McLintock remunerationarrangements’’ below. Total remuneration is subject to an overriding cap such that his total remuneration should not begreater than 3% of M&G’s annual IFRS profits.

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Elements of remuneration

Total remuneration for our executive directors is made up of the elements set out below. Allelements are reviewed annually.

Element Purpose Measures Practice

Salary Provides part Scope of role and market The Remuneration Committee reviews salaries annually. Anyof the position, as well as individual’s changes in basic salary for the Group Chief Executive and theguaranteed contribution and experience, executive directors are effective from January 1.element of taking into account totalremuneration remuneration, marketnecessary to movement of salaries inrecruit and comparator organizations.retain the bestpeople for our Market position compared withbusiness. companies of similar size and

complexity to Prudential, forexample from the FTSE 50 forUK-based remuneration,UK-based asset managementcompanies for M&G and USinsurers for US-basedremuneration.

Annual Rewards the Group financial measures Executive directors have annual incentive plans based on thebonus achievement of Business unit financial measures achievement of annual performance measures taken from the

business and Company’s business plans and individual contributions. Awardsresults and Individual contribution. are payable in cash up to the following levels, and for anyindividual award above these levels in the form of deferred shares.objectives in agiven year. • Group Chief Executive—cash up to 75% of salary

• Group Finance Director and the Chief Executives of UK andAsia—cash up to 50% of salary• Chief Executive of Jackson—cash up to 100% of salary• Chief Executive of M&G—half of any award above £500,000will be in the form of deferred shares (see the section onMichael McLintock’s remuneration on page 167).

In all cases the deferred shares are normally only released afterthree years. Dividends accumulate for the benefit of awardholders during the deferral period. Bonuses awarded are notpensionable.

In addition, the Chief Executive of Jackson receives apercentage of a cash-based senior management bonus pooldetermined by profits of Jackson for the year.

Long Rewards Group—relative TSR All executive directors are provided with awards under theTerm related to performance against peer Group Performance Share Plan and those heading businessesIncentive achieving group. have additional long term incentive plans relating to their

success for Business—internal measures businesses (the Business Unit Performance Plans or in the caseshareholders which contribute to increasing of the Chief Executive of M&G the M&G Executive LTIPover a three shareholder capital. described on page 168). For full details of the plans for theyear period. other executive directors see the section on ‘‘Executive

Directors’ long-term incentive plans’’ on page 164.

All- Allows for all The structure of plans is Executive directors are eligible to participate in all-employeeemployee employees to determined by market practice plans on the same basis as other employees.share participate in and local legislation.plans the success of Further details are set out in the section on ‘‘All-employee

the Company. plans’’ on page 166.

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2MAY200813263666

Element Purpose Measures Practice

Benefits Provide Determined by market Executive directors receive certain benefits for exampleanother comparison/practice. participation in medical insurance schemes, the provision of aguaranteed cash allowance for a car and in some cases the use of a car andelement set at driver and security arrangements. No benefits are pensionable.an appropriate Executive directors are entitled to participate in certain M&Glevel compared investment products on the same terms as available to otherwith peers. members of staff.

Pension Provides Determined by market It is the Company’s policy to provide efficient pension vehiclesincome in comparison/practice. No new to allow executive directors to save for their retirement and toretirement. executive directors appointed make appropriate contributions to their retirement savings

since June 2003 participate in plans. The level of company contribution is related todefined benefit pension plans. competitive practice in the executive directors’ employment

markets.

The executive directors’ pension arrangements and lifeassurance provisions are set out in the ‘‘Directors’ pensions andlife assurance’’ section on pages 175 to 176.

Executive Directors’ long term incentive plans

All long-term incentive arrangements relating to executive directors have a performance period ofthree years. Shares released from all the company’s long-term plans are currently purchased in the openmarket through a trust for the benefit of qualifying employees.

Group Performance Share Plan (‘‘Group PSP’’)

The Group PSP delivers shares to participants subject to performance over a three-year period. Theperformance measure for the award is Prudential’s Total Shareholder Return (‘‘TSR’’) performance overthe performance period compared with the TSR performance of an index comprised of peer companies.TSR is measured on a local currency basis which is considered to have the benefits of simplicity anddirectness of comparison. The vesting schedule is set out in the following table and graph. The unvestedportion of any award lapses. The Committee reviews the peer companies annually and for the 2007awards decided to include Standard Life (which became a public company for the first time in 2006). Nofurther changes were made to the comparator companies for the 2008 awards. Companies in the indexfor 2007 and 2008 are: Aegon, Allianz, Aviva, Axa, Friends Provident, Generali, ING, Legal & General,Manulife, Old Mutual and Standard Life.

Prudential’s TSR relative to Percentage ofthe index at the end of the Award thatperformance period vests

Less than index return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0%Index return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25%Index return � 110% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75%Index return � 120% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%

0%

25%

50%

75%

100%

100% 110% 120%

TSR of Prudential compared with TSR of the index

Per

cent

age

of a

war

d th

at v

ests

164

2MAY200813263530

The Remuneration Committee must also be satisfied that the quality of the Company’s underlyingfinancial performance justifies the level of award delivered at the end of the performance period andmay adjust the vesting level accordingly at its discretion.

To ensure close alignment with our shareholders’ long-term interests, participants receive the valueof reinvested dividends over the performance period for those shares that vest.

Business Unit Performance Plan (‘‘BUPP’’)

For executive directors with regional responsibilities, this plan delivers share and cash-based awards,subject to a three-year performance period. The performance measure under the BUPPs is ShareholderCapital Value (SCV) which is shareholders’ capital and reserves on a European Embedded Value (‘‘EEV’’)basis (using the EEV Principles for reporting adopted by European insurance companies) for eachregional business unit. Payouts depend on the increase in SCV over the performance period, with therequired growth rates being different for each of Prudential’s business regions to reflect the relativematurity of the markets and the different business environments. The vesting schedules are set out inthe table below. The unvested portion of any award lapses.

Business Unit Performance Plan

Compoundannual growth in

ShareholderCapital ValuePercentage of over three yearsAward that

vests UK JNL Asia

0% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . <8% <8% <15%30% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8% 8% 15%75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11% 10% 22.5%100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14% 12% 30%

0%

30%

75%

100%

0%

Compound annual growth in Shareholder Capital Value over 3 years

Per

cent

age

of a

war

d th

at v

ests

Threshold Maximum

The Remuneration Committee must also be satisfied that the quality of the underlying financialperformance of each business unit justifies the level of award delivered at the end of the performanceperiod and may adjust vesting levels accordingly at its discretion.

To ensure close alignment with our shareholders’ long-term interests, participants receive the valueof reinvested dividends over the performance period for those shares that vest.

Prudential is intending to change its supplementary basis of reporting from European EmbeddedValue (‘‘EEV’’) to Market Consistent Embedded Value (‘‘MCEV’’). The development of the MCEVPrinciples and Guidance by the CFO Forum of European Insurance Companies is currently at anadvanced stage and they are likely to be issued by mid 2008.

The Remuneration Committee will keep the targets for the awards under review to ensure that thevesting outcomes are not materially distorted either up or down by such a change.

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The M&G long-term incentive arrangements for Michael McLintock are discussed on page 168.

All-employee plans

UK-based executive directors are eligible to participate in the Prudential HM Revenue and Customs(HMRC) approved UK Savings Related Share Option Scheme (SAYE scheme) and the Asia-basedexecutive director can participate in the equivalent International SAYE scheme. The schemes allowemployees to save towards the exercise of options over Prudential plc shares, at an option price set atthe beginning of the savings period at a discount of up to 20 per cent to the market price. Savingscontracts may be up to £250 per month for three or five years, or additionally in the UK scheme sevenyears. On maturity at the end of the set term, participants may exercise their options within six monthsof the end of the savings period and purchase Prudential plc shares. If an option is not exercised withinsix months, participants are entitled to a refund of their cash contributions plus interest if applicableunder the rules. Shares are issued to satisfy options that are exercised. No options may be grantedunder the schemes if the grant would cause the number of shares which have been issued, or whichremain issuable pursuant to options granted in the preceding 10 years under the scheme and othershare option schemes operated by the Company, or which have been issued under any other shareincentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at theproposed date of grant.

UK-based executive directors are also eligible to participate in the Company’s HMRC approvedShare Incentive Plan which allows all UK-based employees to purchase shares of Prudential plc(partnership shares) on a monthly basis out of gross salary. For every four partnership shares bought, anadditional matching share is awarded, which is purchased by Prudential on the open market. Dividendshares accumulate while the employee participates in the plan. Partnership shares may be withdrawnfrom the scheme at any time. If the employee withdraws from the plan within five years the matchingshares are forfeited and if within three years, dividend shares are also forfeited.

Pensions policy

The executive director employed in the United States is eligible to participate in a 401K approvedpension scheme, on the same basis as all other US based employees, into which contributions of 6% ofbasic salary up to a maximum of $225,000, were made in 2007. He is also eligible to participate in theprofit sharing element of Jackson’s IRS-approved Defined Contribution Retirement Plan. The plan is anall-employee plan that provides eligible participants with annual profit sharing, depending on thefinancial results of Jackson for the plan year, with a maximum of 6 per cent of salary capped at $13,200in 2007.

The executive director employed in Asia is eligible to receive a 25 per cent salary supplement forpension purposes.

UK executive directors are offered a combination of HMRC approved pension schemes andsupplementary provisions. Participation in the HMRC approved pension schemes is on the same basis asother employees who joined at the same date as the executive director in question. For defined benefitschemes, our policy is to retain a notional scheme earnings cap, set at £108,600 and £112,800 for the2006/07 and 2007/08 tax years respectively. No employees with employment offers after June 30, 2003are eligible for membership of any defined benefit schemes.

For UK executive directors hired after June 30, 2003, the Company’s policy is to provide asupplement of 25 per cent of salary. This includes, where relevant, any Company contributions to thestaff defined contribution pension plan, which UK executive directors would be eligible to join. This planhas no salary cap.

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Changes from previous policy

Apart from the change to Michael McLintock’s 2007 LTIP award, which is detailed below, the onlychange to policy that was made in 2007 was an amendment to the rules covering deferred share awardsfrom annual incentive plans, confirming that the shares would normally be made available at the end ofthe period and clarifying the treatment of leavers.

Michael McLintock remuneration arrangements

In the 2006 accounts we indicated that the remuneration structures of Michael McLintock would bereviewed in 2007. As a result of this, an additional award was made under the current LTIP in 2007 anda new structure has been approved for 2008.

2007 Long Term Incentive Award

As a result of this review, it was decided that Michael McLintock’s remuneration was below marketfor the superior level of performance achieved in recent years. After consulting with shareholders, anLTIP award was made to Michael McLintock under the share section of the current M&G Chief ExecutiveLong-Term Incentive Plan. This plan provides phantom M&G share awards, the value of which dependson the profit and fund performance of M&G over the performance period. The notional startingphantom share price is £1.00. The change in the phantom share price equals the change in M&G profit,modified by the investment performance of M&G over the performance period. For 2007 the face valueof the share award was £1,333,000 with an expected value of £1,999,500. The value of the units afterthree years will be paid in cash.

Remuneration arrangements for 2008 onwards

A full review of the remuneration arrangements for Michael McLintock was undertaken in 2007. Ourmajor shareholders were consulted in October and November 2007 on the arrangements to apply from2008.

Salary and benefits

No change was made to Michael McLintock’s salary which is set at a competitive level relative tothe asset management sector. Additionally, there were no changes to the benefits.

Annual bonus

Awards will be made based on M&G’s performance both in absolute terms and relative to its peerswith bonus amounts determined by an assessment of market competitive rewards for median andsuperior performance. In line with practice in the asset management sector there will be no specifiedmaximum annual bonus award going forward. For 2008, we would not anticipate bonus levels to differsignificantly from awards under the current plan for comparable levels of performance.

Any bonus award up to £500,000 will be paid in cash and half of any bonus awarded over£500,000 will be in the form of an award of Prudential shares deferred for three years. Dividends willaccumulate during the deferral period on any deferred shares. This deferral policy will be applied toawards from 2008, including the 2007 annual bonus award.

Long term incentive plans

Group Performance Share Plan

As in 2007, in 2008 an award of 100% of salary was made to Michael McLintock under the GroupPerformance Share Plan.

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New M&G long term incentive plan

Following shareholder approval, a new M&G Executive LTIP will be introduced. Under this plan,awards of phantom shares will be made. The phantom share price at vesting will be determined by theincrease or decrease in M&G’s profits over the three year performance period, with a notional startingshare price of £1.00.

The number of phantom shares in the award will depend on the performance of M&G in thefinancial year prior to the award being made and an assessment of Michael McLintock’s contribution.Thus the award to be made in 2008 will be related to the business performance in 2007. For medianperformance, the new plan has been calibrated to provide a similar level of reward as the current plan.In recognition of M&G’s strong performance in 2007, an award of phantom shares with a face value of£1,141,176 and an expected value of £1,940,000 will be made in 2008. This award is subject toshareholder approval of the plan.

The number of phantom shares subject to the award will be adjusted at the end of the three yearperformance period to take account of the performance of M&G both in terms of appropriate levels ofprofitability and maintaining strong fund investment performance as follows:

Profit Growth

• Awards will be scaled back based on profit performance achieved if profits in the third year areless than the average of the profits over the prior year and the performance period.

• The scaling back will be on a straight line basis from 0 per cent to 100 per cent of the awardbetween zero profit and the achievement of profits equal to the average.

• No award will vest in the event of a loss or zero profit, irrespective of fund performance.

• No adjustment will be made if the profits at the end of the third year are at least equal to theaverage of the profits over the prior year and the performance period.

Investment Performance

• Where investment performance over the three year performance period is in the top twoquartiles the number of phantom shares vesting will be enhanced. A sliding scale will apply up to200% of the annual award, which is awarded when top quartile performance is reached.

• Awards will be forfeited if investment performance is in the fourth quartile, irrespective of anyprofit growth.

The value of the vested shares will be paid in cash after the end of the three year performanceperiod.

Should Michael McLintock leave the Group, the award will be forfeited unless he were termed a‘‘good leaver’’ (for instance death, disability or ill health) in which case the award would vest but wouldbe pro-rated based on the number of days employed compared with the total number of days in theperformance period. The exit value would be based on the profits and investment performance at theend of the previous financial year.

In the event of a change of control of the Company, the award will remain in place and vest at theend of the normal three year performance period. The exit value of the award will be underpinned atprofit levels projected by the most recently adopted M&G business plan prior to the change of control.If Michael McLintock were to leave within 12 months of a change of control for reasons associated withthe change a pro-rated award would vest.

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Total remuneration limit

In normal circumstances we would not expect Michael McLintock’s total remuneration to exceedthree per cent of M&G’s IFRS profits, as currently defined for accounting purposes. Should theCommittee ever wish to exceed this percentage it will consult with the Company’s largest shareholdersprior to making any awards and disclose in the Directors’ Remuneration Report the reasons, in itsopinion, the three percent cap should be exceeded.

Directors’ shareholdings

Shareholding guidelines

As a condition of serving, all executive and non-executive directors are currently required to havebeneficial ownership of 2,500 ordinary shares in the Company. This interest in shares must be acquiredwithin two months of appointment to the Board if the director does not have such an interest uponappointment.

Executive directors should have a substantial shareholding which should be built up over a periodof five years. Shares earned and deferred under the annual incentive plan are included in calculating theexecutive director’s shareholding.

Until the guideline is met, at least half the shares released from long-term incentive awards after taxshould be retained by the executive director.

Guideline Shareholdingpolicy—after five years

Philip Broadley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 � salaryClark Manning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 � salaryMichael McLintock * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 � salaryNick Prettejohn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 � salaryBarry Stowe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 � salaryMark Tucker * . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 � salary

* with an interim target of 1 � salary after three years

Executive directors’ non-executive director earnings

Executive directors who are released to serve as non-executive directors of other externalcompanies retain the earnings resulting from such duties. In 2007, Michael McLintock earned £48,542from an external company. Other executive directors served as non-executive directors on the boards ofcompanies in the educational and cultural sectors without receiving a fee for those services. See‘‘—Board Practices—policy on external appointments’’.

Remuneration for 2007

The following sections provide information on payments, outstanding conditional incentive awardsand shares released in 2007 for each executive director.

Directors’ outstanding long-term incentive awards

Share-based long-term incentive awards

The section below sets out the outstanding share awards under the Restricted Share Plan, theGroup Performance Share Plan and the awards under additional long-term plans for the executivedirectors who run specific businesses.

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Share rights granted under the share-based long term incentive plans

Conditional Releasesshare or rights

awards Market (options) Conditionaloutstanding price granted share awards Date of end of

Year of at Conditional at date of upon outstanding at performanceinitial January 1, awards in original vesting December 31, period

Plan name award 2007 2007 award in 2007 2007 (December 31)

(Number of (Number of (pence) (Number of (Number ofshares) shares) shares) shares)

Philip BroadleyRestricted Share Plan . . . . . . . . . 2004 210,713 —(1) 2006Restricted Share Plan . . . . . . . . . 2005 182,983 182,983(2) 2007Group Performance Share Plan . . . . 2006 170,127 170,127(3) 2008Group Performance Share Plan . . . . 2007 147,559 745 147,559(4) 2009

563,823 147,559 500,669

Clark ManningRestricted Share Plan . . . . . . . . . 2004 196,174 —(1) 2006Restricted Share Plan . . . . . . . . . 2005 163,352 163,352(2) 2007Group Performance Share Plan . . . . 2006 241,415 241,415(3) 2008Business Unit Performance Plan

(share element) . . . . . . . . . . . 2006 120,707 120,707 2008Group Performance Share Plan . . . . 2007 191,140 745 191,140(4) 2009Business Unit Performance plan

(share element) . . . . . . . . . . . 2007 95,570 745 95,570 2009

721,648 286,710 812,184

Michael McLintockRestricted Share Plan . . . . . . . . . 2004 67,429 —(1) 2006Restricted Share Plan . . . . . . . . . 2005 58,555 58,555 2007Group Performance Share Plan . . . . 2006 64,199 64,199(3) 2008Group Performance Share Plan . . . . 2007 52,040 745 52,040(4) 2009

190,183 52,040 174,794

Mark NorbomRestricted Share Plan . . . . . . . . . 2004 200,177 —(1) 2006Restricted Share Plan . . . . . . . . . 2005 182,983 —(5) 2007Group Performance Share Plan . . . . 2006 144,648 —(5) 2008Business Unit Performance plan

(share element) . . . . . . . . . . . 2006 72,324 —(5) 2008

600,132 —

Nick PrettejohnGroup Performance Share Plan . . . . 2006 149,964 149,964(4) 2008Business Unit Performance Plan

(share element) . . . . . . . . . . . 2006 74,982 74,982 2008Group Performance Share Plan . . . . 2007 130,071 745 130,071 2009Business Unit Performance Plan

(share element) . . . . . . . . . . . 2007 65,035 745 65,035 2009

224,946 195,106 420,052

Barry StoweGroup Performance Share Plan . . . . 2007 105,706 745 105,706(4) 2009Business Unit Performance Plan

(share element) . . . . . . . . . . . 2007 52,853 745 52,853 2009

158,559 158,559

Mark TuckerRestricted Share Plan . . . . . . . . . 2005 356,817 356,817(2) 2007Group Performance Share Plan . . . . 2006 337,044 337,044(3) 2008Group Performance Share Plan . . . . 2007 295,067 745 295,067(4) 2009

693,861 295,067 988,928

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Cash rights granted under the Business Unit Performance Plan

Conditionalawards Conditional

outstanding awards Date of end ofat Payments outstanding at performance

Year of January 1, Conditional made in December 31, periodPlan name initial award 2007 awards in 2007 2007 2007 (December 31)

£000 £000 £000 £000Clark Manning

Business Unit Performance Plan (Cashelement) . . . . . . . . . . . . . . . . . . 2006 577 577 2008

Business Unit Performance Plan (Cashelement) . . . . . . . . . . . . . . . . . . 2007 624 624 2009

Mark NorbomBusiness Unit Performance Plan (Cash

element) . . . . . . . . . . . . . . . . . . 2006 361 —(5) 2008Nick Prettejohn

Business Unit Performance Plan (Cashelement) . . . . . . . . . . . . . . . . . . 2006 374 374 2008

Business Unit Performance Plan (Cashelement) . . . . . . . . . . . . . . . . . . 2007 400 400 2009

Barry StoweBusiness Unit Performance Plan (Cash

element) . . . . . . . . . . . . . . . . . . 2007 325 325 2009

Restricted Share Plan awards

For Restricted Share Plan awards in 2004 and 2005, no rights were granted if the Company’s TSRperformance as ranked against the comparator group (those companies remaining out of the FTSE 100 atthe beginning of the performance period) was at the 50th percentile or below. The maximum grant ismade only if the TSR ranking of the Company is 20th percentile or above. Between these points, thesize of the grant made is calculated on a straight line sliding scale. In normal circumstances, directorsmay take up their right to receive shares at any time during the following seven years.

2007 Awards

The awards made under the Group Performance Share Plan and the Business Unit Performance Planin respect of 2007 have a performance period from January 1, 2007 to December 31, 2009.

In determining the 2007 conditional share awards the shares were valued at their average shareprice during the preceding calendar year, and the price used to determine the number of shares was614.91pence.

Group Performance Share Plan

Awards under the Group Performance Share Plan are described on page 164.

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Business Unit Performance Plan

Awards under the Business Unit Performance Plan are described on page 165.

Notes: Performance levels under current awards at December 31, 2007:

AwardNote Plan year Performance levels under current awards at December 31, 2007

1 Restricted Share 2004 The ranking of the Company’s TSR was ranked at 56th percentile at the end of the threePlan year performance period ending on December 31, 2006 and as a result the 2004 awards

lapsed.

2 Restricted Share 2005 The ranking of the Company’s TSR at the end of the three year performance periodPlan ending on December 31, 2007 was 30th out of the remaining 85 companies in the

FTSE 100 (35th percentile) and as a result it is anticipated that nil cost options over62.5% of the maximum number of shares in each award will be made over 114,365shares for Philip Broadley, 102,095 shares for Clark Manning, 36,597 shares for MichaelMcLintock and 223,011 shares for Mark Tucker.

3 Group Performance 2006 At December 31, 2007 Prudential’s TSR performance was 121.4 per cent of the TSRShare Plan performance of the index.

At this performance level, 100% of the maximum award would vest.

4 Group Performance 2007 At December 31, 2007 Prudential’s TSR performance was 113.1 per cent of the TSRShare Plan performance of the index.

At this performance level, 84% of the maximum award would vest.

5 Mark Norbom The 2005 RSP, 2006 Group Performance Share Plan and 2006 Business Unit PerformancePlan awards for Mark Norbom lapsed on the termination of his employment.

Business-specific cash-based long-term incentive plans

Details of all outstanding awards under other cash-based long-term incentive plans up to andincluding 2007 are set out in the table below. The performance period for all awards is three years.

Face value ofconditional

awards Face value ofoutstanding conditional awards Date of end of

Year of at Conditionally Payments outstanding at performanceinitial January 1, awarded in made in December 31, periodaward 2007 2007 2007 2007 (December 31)

£000 £000 £000 £000Clark Manning

Business Cash LTIP . . . . . . . . . 2004 1,295 2,013 — 2006Business Cash LTIP . . . . . . . . . 2005 1,295 1,295 2007

Michael McLintockPhantom M&G options . . . . . . . 2000 184 403 — 2002Phantom M&G options . . . . . . . 2001 368 368 2003Phantom M&G options . . . . . . . 2002 368 368 2004Phantom M&G options . . . . . . . 2003 368 368 2005Phantom M&G options . . . . . . . 2004 368 368 2006Phantom M&G shares . . . . . . . 2004 225 583 — 2006Phantom M&G options . . . . . . . 2005 368 368 2007Phantom M&G shares . . . . . . . 2005 225 225 2007Phantom M&G options . . . . . . . 2006 368 368 2008Phantom M&G shares . . . . . . . 2006 225 225 2008Phantom M&G shares . . . . . . . 2007 1,333 1,333 2009

Mark NorbomBusiness Cash LTIP . . . . . . . . . 2004 713 413 — 2006Business Cash LTIP . . . . . . . . . 2005 750 — 2007

Total cash payments made in 2007 . 3,412

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Clark Manning

In 2004 and 2005 Clark Manning participated in a cash-based long-term plan that rewards thegrowth in appraisal value of Jackson. The award payout equals an initial award value adjusted by thechange in the Prudential plc share price over the performance period. In order for any award to bemade under the 2005 plan, the growth rate over the performance period must be greater or equal toeight per cent compound growth per annum. At this level of performance, the initial award value isUS$864,240. If the on-target performance level of 11.5 per cent per annum compound is achieved theinitial award value is doubled. If the annual growth rate is at least 17.5 per cent, the payout increases toa maximum of three times the initial award value. For performance between these points, payouts are ona straight line sliding scale.

For the 2004 award the results led to a payment of US$4,028,896. The face values of the awardsfor Clark Manning are converted at the average exchange rate for 2007 which was US$2.0015 = £1(2006: $1.8430 = £1). For the 2005 Business Cash LTIP, the compound annual growth rate in appraisalvalue was 22.8 per cent and as a result a payment of $4,416,308 was made.

Michael McLintock

Michael McLintock’s 2004, 2005 and 2006 cash long-term incentive awards were under the M&GChief Executive Long-Term Incentive Plan that provides a cash reward through phantom M&G shareawards and options. For these awards, the phantom share price at the beginning of the performanceperiod was £1. The change in the phantom share price equals the change in M&G profit, modified up ordown by the investment performance of M&G, over the performance period. For each year the facevalue of the share award was £225,000 and the phantom option award had a face value of £367,800.Provided the phantom share options have value, they may be exercised in part or in full during annualexercise periods after three to seven years from the start of the performance period.

For the 2004 award the phantom share price at the end of the performance period was £2.59. Thisresulted in a payment from the phantom share award of £582,750 and a phantom option award of367,800 units. Michael McLintock did not exercise any of these options. For the 2005 award, thephantom share price at the end of the performance period was £2.34. This resulted in a payment of£526,500 from the share element of the award.

Under the rules of Michael McLintock’s 2000 phantom option award, a payment of £402,741 wasmade at the end of the seven year exercise period.

Following consultations with shareholders an award with a face value of £1,333,000 was made in2007 under the share element of the M&G Chief Executive Long-Term Incentive Plan.

Mark Norbom

Mark Norbom’s awards under the Business Cash LTIP for 2004 vested as a result of Asia’sperformance and a payment of £412,751 was made in 2007. On the termination of his employment hisaward under the 2005 Business Cash LTIP lapsed.

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Other share awards

The table below sets out the share awards that have been made to executive directors under their appointmentterms and those deferred from annual incentive plan payouts. The values of the deferred share awards are includedin the bonus and total figures in the Directors’ Remuneration table on page 161. The number of shares is calculatedusing the average share price over the three business days commencing on the day of the announcement of theGroup’s annual financial results for the relevant year. For the 2006 awards, which were made in 2006, the averageshare price was 681.5 pence.

Conditionalshare Conditional

awards Shares share awards Shares Market Marketoutstanding Conditionally Scrip released outstanding at released price at price atat January 1, awarded in dividends in 2007 December 31, Date of in 2007 original date of

Year of 2007 2007 accumulated (Number 2007 end of (Number date of vesting orinitial (Number (Number of (Number of of (Number of restricted of Date of award releasegrant of shares) shares) shares) shares) shares) period shares) release (pence) (pence)

Philip BroadleyDeferred 2003 annual

incentive award . . . . 2004 6,387 6,387 — December 31, 2006 6,387 March 15, 2007 502 675Deferred 2005 annual

incentive award1 . . . . 2006 31,954 789 32,743 December 31, 2008Deferred 2006 annual

incentive award1 . . . . 2007 31,100 768 31,686 December 31, 2009Clark ManningDeferred 2006 annual

incentive award1 . . . . 2007 9,100 224 9,324 December 31, 2009Michael McLintockDeferred 2003 annual

incentive award . . . . 2004 57,121 57,121 — December 31, 2006 57,121 March 15, 2007 502 675Deferred 2004 annual

incentive award . . . . 2005 93,750 2,317 96,067 — December 31, 2007 96,0637 December 31, 2007 475 712Deferred 2005 annual

incentive award1 . . . . 2006 84,779 2,095 86,8741 December 31, 2008Deferred 2006 annual

incentive award1 . . . . 2007 81,438 2,012 83,450 December 31, 2009Mark NorbomAwards under

appointment terms2 . . 2004 89,353 89,353 — January 1, 2007 89,353 February 2, 2007 439 705.552004 31,596 — January 1, 20082004 15,339 — January 1, 20092004 414,826 87,403 — February 20, 2013 87,403 February 28, 2007 439 673.5

Deferred 2004 annualincentive award1 . . . . 2005 33,965 33,965 — December 31, 2007 33,965 February 8, 2007 475 715

Deferred 2005 annualincentive award1 . . . . 2006 18,3062 18,306 — December 31, 2008 18,306 February 8, 2007 715.5 715

Nick PrettejohnAwards under

appointment terms3 . . 2006 16,000 16,000 — October 31, 2007 16,000 October 31, 2007 627.5 712.55,500 5,500 October 31, 2008

Deferred 2006 annualincentive award1 . . . . 2007 11,837 291 12,128 October 31, 2007

Barry StoweAwards under

appointment terms4 . . 2006 7,088 7,088 — May 1, 2007 7,088 May 1, 2007 702 7467,088 7,088 May 1, 20087,088 7,088 May 1, 2009

28,706 28,706 September 1, 20097,088 7,088 January 1, 20102,110 2,110 May 1, 2010

Mark TuckerDeferred 2005 annual

incentive award1 . . . . 2006 37,206 919 38,125 December 31, 2008Deferred 2006 annual

incentive award1 . . . . 2007 72,302 1,786 74,088 December 31, 2009

1. Under the annual bonus plans, the element of bonus for performance above target is made in the form of a share award deferred forthree years.

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2. In 2007, a deferred share award from his 2006 annual bonus valued at £211,947 was made to Philip Broadley. Under theterms agreed on his leaving the company, the outstanding deferred awards to Philip Broadley will be released after histermination date.

3. In 2007, a deferred share award from his 2006 annual bonus valued at $121,360 was made to Clark Manning. The exchangerate used was $1.8430 = £1.

4. In 2007, a deferred share award from his 2006 annual bonus valued at £555,000 was made to Michael McLintock.

5. In 2007, a deferred share award from his 2006 annual bonus valued at £80,673 was made to Nick Prettejohn

6. In 2007, a deferred share award from his 2006 annual bonus valued at £492,744 was made to Mark Tucker.

7. Mark Norbom’s deferred shares under the 2004 Annual Incentive Plan (33,965 shares) and 2005 Annual Incentive Plan(18,306 shares) were released to him in February 2007. In addition, the 89,353 employer replacement shares which vestedon January 1, 2007 were released and the Remuneration Committee exercised its discretion to allow a further 87,403 sharesout of his awards under the appointment terms to vest, representing the proportion of the performance period which MarkNorbom had worked in respect of his pension replacement shares. Awards over 374,358 shares granted under the terms ofMark Norbom’s appointment lapsed.

8. In order to secure the appointment of Nick Prettejohn, he was awarded rights to Prudential plc shares that vest as set out inthe table. In normal circumstances, releases are conditional on Nick Prettejohn being employed by Prudential at the date ofvesting. If there is a change of control of Prudential he may be entitled to retain any unvested awards.

9. In order to secure the appointment of Barry Stowe and to compensate him for the loss of substantial amounts of outstandinglong-term remuneration from his former employer, he was awarded rights to Prudential plc American Depositary Receipts,that vest as set out in the table. The figures in the table are the equivalent number of Prudential plc shares (one AmericanDepositary Receipt equals two Prudential plc shares). In normal circumstances, releases are conditional on Barry Stowe beingemployed by Prudential at the date of vesting. If there is a change of control of Prudential he may be entitled to retain anyunvested awards.

In order to compensate for the loss of share options from his former employer, Barry Stowe was also awarded 1,255Prudential plc ADRs in 2007.

Directors’ pensions and life assurance

The pensions policy is set out on page 166. Prudential’s current practice in respect of pensionarrangements for the current executive directors is set out below.

Philip Broadley participates in a non-contributory scheme that provides a pension of 1/60th of FinalPensionable Earnings for each year of service on retirement at age 60. Michael McLintock participates ina contributory scheme that provides a target pension of 2/3rds of Final Pensionable Earnings onretirement at age 60 for an employee with 30 years or more potential service, for which his contributionis 4 per cent of basic salary. In both cases Final Pensionable Earnings are capped by a notional schemeearnings cap which replicates the HMRC earnings cap in force before A-Day (April 6, 2006).

Philip Broadley and Michael McLintock are entitled to supplements based on the portion of theirbasic salary not covered for pension benefits under a HMRC approved scheme. They are also providedwith life assurance cover of four times salary.

Nick Prettejohn is paid a salary supplement and he is a member of the staff defined contributionpension plan, which provides death in service benefits including life assurance of four times salary. Thecompany contributions to the pension plan and his salary supplement are in total 25 per cent of hissalary.

Mark Tucker is paid a salary supplement of 25 per cent of his salary. He is also provided with lifeassurance cover of four times salary.

Clark Manning participates in a US tax-qualified defined contribution plan (a 401K plan). He is alsoprovided with life assurance cover of two times salary.

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Barry Stowe is paid a salary supplement of 25 per cent of his salary. He is also provided with lifeassurance cover of four times salary.

Where supplements for pension purposes are paid in cash, the amounts are included in the table onDirectors’ Remuneration on page 161.

Details of directors’ pension entitlements under HMRC approved defined benefit schemes andsupplements that are in the form of contributions to pension arrangements paid by the Company are setout in the following table.

Transfer value ofAdditional pension earned accrued benefit

during year ended atDecember 31, 2006 December 31(3)

Amount ofYears of Ignoring Allowing (B-A) less

pensionable inflation on for inflation contributionsservice Accrued pension on pension made Contributions to

Age at at benefit at earned to earned to by directors pension and lifeDecember 31, December 31, December 31, December 31, December 31, 2007 2006 during assurance

2007 2007 2007 2006(1) 2006(2) B A 2007 arrangements(4)

(in £ Thousands)

Sir DavidClementi . . 58 — — — — — — — 15

PhilipBroadley . . 46 7 14 2 2 135 111 24 —

ClarkManning . . 49 — — — — — — — 15

MichaelMcLintock . 46 15 38 3 4 435 397 25 91

NickPrettejohn . 47 — — — — — — — 74

Barry Stowe . 50 — — — — — — — —Mark Tucker . 50 — — — — — — — 11

Notes

(1) As required by Stock Exchange Listing rules.

(2) As required by the Companies Act remuneration regulations.

(3) The transfer value equivalent has been calculated in accordance with Actuarial Guidance Note GN11.

(4) Supplements in the form of cash are included in the Directors’ Remuneration table on page 161.

No enhancements to the retirement benefits paid to or receivable by directors or former directorsother than the discretionary pension increases awarded to all pensioners have been made during theyear.

Total contributions to directors’ pension arrangements including cash supplements for pensionpurposes were £1,163,687 (2006: £1,161,410) of which £166,557 (2006: £138,937) related to moneypurchase schemes.

Share Ownership

Directors’ Shareholdings

The current shareholding policy is that as a condition of serving, all executive and non-executivedirectors are required to have beneficial ownership of 2,500 ordinary shares in Prudential. This interestin shares must be acquired within one year. Annually the non-executive directors use the net value of£25,000 of their total annual gross fees to purchase shares in Prudential. Shares are purchased eachquarter and are held at least until retirement from the Board.

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The interests of directors in ordinary shares of Prudential are shown below and include sharesacquired under the Share Incentive Plan, the deferred annual incentive awards detailed in the table onother share awards under ‘‘—Other share awards’’ above, and interests in shares awarded onappointment. Awards that remain conditional under the Restricted Share Plan, Prudential GroupPerformance Share Plan, and Prudential Business Unit Performance Plan are excluded. The interests ofdirectors in office at March 31, 2008 in ordinary shares of the Company are shown below. All interestsare beneficial.

ApproximateHolding as of Percentage of

March 31, OrdinaryName(1) 2008 Shares

Philip Broadley(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,696 0.0047Sir Winfried Bischoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,413 0.0009Sir David Clementi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51,555 0.0021Keki Dadiseth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,362 0.0010Michael Garrett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,858 0.0010Ann Godbehere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,320 0.0002Bridget Macaskill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,482 0.0008Clark Manning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,060 0.0022Michael McLintock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459,543 0.0187Kathleen O’Donovan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,803 0.0006Nick Prettejohn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114,016 0.0047James Ross . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,012 0.0006Barry Stowe(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107,229 0.0044Tidjane Thiam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,112 0.0082Mark Tucker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389,936 0.0158Lord Turnbull . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,586 0.0003

(1) Current information has not been provided on Roberto Mendoza because he was not a director at March 31, 2008 andPrudential does not maintain any information on his current shareholdings. On leaving Roberto Mendoza had an interest of219,127 ordinary shares (at May 22, 2007).

(2) The shares in the table include shares purchased under the Prudential Services Limited Share Incentive Plan together withMatching Shares (on a 1:4 basis) that will only be released if the employee remains in employment for three years. For PhilipBroadley the total number of Matching Shares at March 31, 2008 was 177.

(3) Barry Stowe’s interest in shares includes 33,339 American Depositary Receipts (representing 66,678 ordinary shares).

Prudential is not owned or controlled directly or indirectly by another corporation or by anygovernment or by any other natural or legal person severally or jointly and Prudential does not know ofany arrangements that might result in a change in Prudential’s control.

In addition, Prudential’s directors and other executive officers held, as at March 31, 2008, optionsto purchase 9,111 shares, all of which were issued pursuant to Prudential’s Savings-Related ShareOption Scheme. These options and plans are described in more detail below under ‘‘—Options toPurchase Securities from Prudential’’ in this section.

Outstanding Options of Directors and Other Executive Officers

Outstanding options under the Savings-Related Share Option Scheme (referred to as SAYE) are setout below. The Savings-Related Share Option Scheme is open to all UK and certain overseas employeesand options up to the Inland Revenue limits are granted at a 20 per cent discount and cannot normallybe exercised until a minimum of three years has elapsed. No payment has been made for the grant of

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any such options. The price to be paid for exercise of these options is shown in the table below. Novariations to any outstanding options have been made.

Options outstanding Exercise price Earliest LatestName(1) at March 31, 2008 (pence)(2) exercise date exercise date

Mark Tucker . . . . . . . . 2,297 407 December 1, 2008 May 31, 2009Michael McLintock . . . 6,153 266 June 1, 2008 November 30, 2008Nick Prettejohn . . . . . . 661 565 June 1, 2009 November 30, 2009TOTAL . . . . . . . . . . . 9,111

(1) None of Sir David Clementi, Keki Dadiseth, Michael Garrett, Bridget Macaskill, Clark Manning, Barry Stowe, KathleenO’Donovan, James Ross, Lord Turnbull, Sir Winfried Bischoff or Ann Godbehere holds options to purchase Prudential shares.

(2) The market price of shares at April 30, 2008 was 690 pence. The highest and lowest share prices during 2007 were810 pence and 619 pence, respectively.

Options to Purchase Securities from Prudential

As of March 31, 2008, 8,851,874 options were outstanding, which Prudential issued under theSavings-Related Share Option Schemes. As of March 31, 2008 directors and other executive officersheld 9,111 of such outstanding options. Except as described above in ‘‘—Outstanding Options ofDirectors and Other Executive Officers’’, each option represents the right of the bearer to subscribe forone share at a particular pre-determined exercise price at a pre-set exercise date.

As of March 31, 2008, 5,308 options were outstanding under the Restricted Share Plan. Suchoutstanding options held by directors or other executive officers are included in the shares set forthunder ‘‘—Senior Executives’ Long-term Incentive Plans’’ in this section above.

As of March 31, 2008, 2,259,400 shares were outstanding under the Prudential Jackson NationalLife US Performance Share Plan, none of which was held by directors or other executive officers.

As of March 31, 2008, 8,678,584 shares were outstanding under other awards. Of those, 856,984shares were outstanding under the Annual Incentive Plan, 780,938 shares were outstanding under thePruCap Deferred Bonus Plan, 1,118,833 shares were outstanding under the Asia Retention Plan,472,248 shares were outstanding under the One Off Awards, 3,485,617 shares were outstanding underthe Group Performance Share Plan and 1,963,964 shares were outstanding under the Business UnitPerformance Plan. Such outstanding awards held by directors or other executive officers are included inthe shares set forth under ‘‘—Senior Executives’ Long-term Incentive Plans’’ in this section above.

The aggregate proceeds that would arise if all outstanding options under the Savings-Related ShareOption Schemes were exercised is £38 million. The latest expiration dates for exercise or release of the

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securities underlying the options or awards and the number of options or shares are set out in the tablebelow.

SharesOutstandingUnder thePrudential

Jackson Options Options SharesNational Life Outstanding Outstanding Outstanding

US Under Under Savings- UnderPerformance Restricted Related Share Other

Year of Expiration Share Plan Share Plan Option Scheme Awards Total

(In Millions)

2008 . . . . . . . . . . . . . . . . . . . . . — 0.005 3.262 0.761 4.0282009 . . . . . . . . . . . . . . . . . . . . . 0.853 — 2.468 2.978 6.2992010 . . . . . . . . . . . . . . . . . . . . . 0.81 — 2.067 3.789 6.6662011 . . . . . . . . . . . . . . . . . . . . . 0.596 — 0.52 0.472 1.5882012 . . . . . . . . . . . . . . . . . . . . . — — 0.426 0.679 1.1052013 . . . . . . . . . . . . . . . . . . . . . — — 0.069 — 0.0692014 . . . . . . . . . . . . . . . . . . . . . — — 0.04 — 0.04

Total . . . . . . . . . . . . . . . . . . . . . . 2.259 0.005 8.852 8.679 19.795

Board Practices

In accordance with Prudential’s Articles of Association the Board may appoint up to 20 directors.Under Prudential’s current Articles of Association, which were adopted by shareholders at the AnnualGeneral Meeting on May 15, 2008, and in line with UK corporate governance guidelines, all directorsare required to submit themselves for re-election by shareholders every three years at an AnnualGeneral Meeting, and any director appointed by the Board will retire at the first Annual General Meetingfollowing his or her appointment and offer himself or herself for election by shareholders. Prior to theadoption of the current Articles of Association there was an additional requirement for one third ofdirectors to retire at each Annual General Meeting (which included those directors in office for threeyears since their election or last re-election, but did not include those being elected followingappointment by the Board since the previous Annual General Meeting).

Non-executive directors of Prudential are appointed initially for a three-year term, commencing withtheir election by shareholders at the first Annual General Meeting following their appointment by theBoard. Each appointment is reviewed towards the end of this period against performance and therequirements of the Group’s businesses. Non-executive directors are typically expected to serve for twothree-year terms from initial election by shareholders, although the Board may invite them to serve foran additional period.

Upon appointment, all directors embark upon a wide-ranging induction program covering, amongstother things, the principal bases of accounting for the Group’s results, the role of the Board and its keycommittees, and the ambit of the internal audit and risk management functions. In addition, they receivedetailed briefings on the Group’s principal businesses, its product range, the markets in which itoperates and the overall competitive environment. Other areas addressed include legal issues affectingdirectors of financial services companies, the Group’s governance arrangements, its investor relationsprogram, as well as its remuneration policies.

Directors’ indemnities and protections

The Company has arranged appropriate insurance cover in respect of legal action against directorsand senior managers of companies within the Prudential Group. In addition, the Articles of Associationof the Company permit the directors and officers of the Company to be indemnified in respect of

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liabilities incurred as a result of their office. Prudential also provides protections for directors and seniormanagers of companies within the Group against personal financial exposure they may incur in theircapacity as such. These include qualifying third party indemnity provisions (as defined by the relevantUK Companies Act) for the benefit of directors of Prudential, including, where applicable, in theircapacity as directors of other companies within the Group. These indemnities were in force during 2007and remain in force.

Policy on external appointments

Our executive directors may accept external directorships and retain any fees earned from thosedirectorships, subject to prior discussion with the Group Chief Executive, and always provided this doesnot lead to any conflicts of interest. In line with UK governance standards, executive directors would beexpected to hold no more than one non-executive directorship of a FTSE 100 company. A number ofour executive directors hold directorships of companies in the arts and educational sectors, for whichthey do not receive any fees. One of our executive directors, Michael McLintock, serves on the board ofClose Brothers Group plc for which he earns fees, see ‘‘—Compensation—executive directors’ nonexecutive directors earnings’’. The major commitments of executive directors are detailed in theirbiographies on pages 155 to 156.

Board committees

The Board has established audit, remuneration and nomination committees as standing committees,with written terms of reference, which are kept under regular review. These committees are keyelements of the Group’s governance framework, and reports on each are included below:

Audit Committee

This report sets out the responsibilities of the Group Audit Committee (the ‘‘Committee’’) and theactivities carried out by the Committee during the year to meet its objectives.

Role of the Committee

The Committee’s principal responsibilities consist of oversight over financial reporting, internalcontrol and risk management, and monitoring auditor independence. Its duties include gaining assuranceon the control over financial processes and the integrity of the Group’s financial reports, monitoring theperformance, objectivity and independence of the external auditor, and reviewing the work of theinternal auditor.

In performing its duties, the Committee has access to employees and their financial or otherrelevant expertise across the Group and to the services of the Group-wide Internal Audit Director andthe Company Secretary. The Committee may also seek external professional advice at the Group’sexpense.

The Committee’s terms of reference, which are set by the Board and kept under regular review, areavailable on our website at http://www.prudential.co.uk/prudential-plc/aboutpru/corporategovernance/.Alternatively, copies may be obtained upon request from the Company Secretary, at the Company’sregistered office.

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Membership

The Committee is comprised exclusively of independent non-executive directors of the Company, asset out below:

Kathleen O’Donovan ACA (Chairman)Keki Dadiseth FCA (until December 31, 2007)Ann Godbehere FCGA (from October 1, 2007)James Ross (until December 31, 2007)Lord Turnbull KCB CVO

Membership is selected to provide a broad set of financial, commercial and other relevantexperience to meet the Committee’s objectives.

Full biographical details of the members of the Committee, including their relevant experience areset out in their biographies on pages 157 to 159.

Meetings

The Committee met seven times during the year. By invitation, the Chairman of the Board, theGroup Finance Director, the Company Secretary and Group Legal Services Director, the Group-wideInternal Audit Director, and other senior staff from the internal audit, group risk, group finance andgroup compliance functions where appropriate, as well as the lead partner of the external auditorattended meetings. Other audit partners also attended some of the meetings to contribute to thediscussions relating to their areas of expertise.

A detailed forward agenda has been in operation for a number of years which is continuallyupdated to ensure all matters for which the Committee is responsible are addressed at the appropriatetime of year. The Committee’s business during the year included the following:

• Review of half-year and full-year results, press releases and annual report and accounts;

• Examination of critical accounting policies and key judgmental areas;

• Review of US filings and related external audit opinion;

• Review of changes in and implementation of Group Accounting Policies in compliance withInternational Accounting Standards and practices;

• Approval of external auditor’s management representation letter, review of external auditor’sfull-year memorandum, external audit opinion and final management letter;

• Monitoring of auditor independence and the external auditor’s plans and audit strategy, theeffectiveness of the external audit process, the external auditor’s qualifications, expertise andresources, and making recommendations for the re-appointment of the external auditor;

• Monitoring of the framework and effectiveness of the Group’s systems of internal control,Turnbull compliance statement and compliance with the requirements of the Sarbanes-Oxley Act;

• Monitoring the effectiveness of the Group Risk Framework and reviewing the half-yearly key riskreport;

• Review of the internal audit plan and resources, and monitoring of the audit framework andinternal audit effectiveness;

• Monitoring the effectiveness of compliance processes and controls, and performance against theGroup Compliance Plan;

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• Review of its own effectiveness, using external consultants, and review of its terms of reference;and

• Review of anti-money laundering procedures, and allegations received via the employeeconfidential reporting lines.

During the year, the Committee’s standing agenda items also included other reports from thegroup-wide internal audit, group risk, group compliance and group security functions. In addition, theCommittee received presentations on a range of topics including financial control, risk management, andactuarial assumptions and methodologies.

The Committee Chairman reported to the Board on matters of particular significance after eachCommittee meeting, and the minutes of Committee meetings were circulated to all Board members.

The Committee recognizes the need to meet without the presence of executive management. Suchsessions were held in March 2007 with the external and internal auditors, and in July 2007 with theexternal and internal auditors and the Head of Group Security. At all other times, management andauditors have open access to the Committee Chairman.

Financial reporting

As part of its review of financial statements before recommending their publication to the Board,the Committee focused on: critical accounting policies and practices and any changes, decisionsrequiring a major element of judgment, unusual transactions, clarity of disclosures, significant auditadjustments, the going concern assumption, compliance with accounting standards, and compliance withobligations under the Code and other applicable laws and regulations.

In addition, the Committee is regularly briefed by senior management on developments ininternational accounting standards.

Confidential reporting

At each meeting, the Committee received and reviewed a report on calls to the confidentialreporting line, which is made available to employees to enable them to communicate confidentially onmatters of concern, and actions taken in response to these calls. The Committee also consideredwhether any internal control implications arose from communications received. No internal controlimplications were raised from calls to the confidential helpline.

Business unit audit committees

Each business unit has its own audit committee whose members and chairmen are independent ofthe respective business unit. The chairmen of these committees report regularly to the Committee, andtheir meetings are attended by senior management of the respective business unit, including thebusiness units’ chief executives and heads of finance, risk, compliance and internal audit. Business unitaudit committees have adopted standard terms of reference across the Group, with only minor variationsto address overseas requirements or particular requirements of the business. All terms of referenceinclude escalation of significant matters to the Committee, approval of the business unit internal auditplans and overseeing the adequacy of internal audit resources. Also included are presentations fromexternal auditors, and private meetings with local external auditors and the business unit heads ofinternal audit. During the year, the business unit audit committees reviewed and approved theirrespective internal audit plans, resources and the results of internal audit work.

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Internal control and risk management

The Committee reviewed the Group’s statement on internal control systems prior to its endorsementby the Board. It also reviewed the policies and processes for identifying, assessing and managingbusiness risks. Throughout the year, the Committee received the minutes of the Disclosure Committeeand the Group Operational Risk Committee and noted their activities.

Pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act, the Group must undertakean annual assessment of the effectiveness of internal control over financial reporting. To comply with therequirement to report on the effectiveness of its internal controls, the Group has undertaken asignificant project to document and test its internal controls over financial reporting in the formatrequired by the Sarbanes-Oxley Act. The annual assessment and related report from the external auditoris included in this Form 20-F on page 207 under Item 15.

Internal audit

The Committee regards its relationship with the internal audit function as pivotal to theeffectiveness of its own activities. Group-wide Internal Audit plays an important role in supporting theCommittee to fulfill its responsibilities under UK governance standards and the Sarbanes-Oxley Act, andprovides independent assurance on the Company’s processes of identification and control of risk. TheCommittee agreed the 2007 work program of the internal audit function. Each of the Group’s businessunits has an internal audit team, the heads of which report regularly to the Group-wide Internal AuditDirector. Internal audit resources, plans and work are overseen by the Committee and by business unitaudit committees. Across the Group, total internal audit headcount stands at 135. The Group-wideInternal Audit Director reports functionally to the Committee and for management purposes to theGroup Chief Executive.

Formal reports are submitted to the Committee on a quarterly basis, with interim updates whereappropriate, and views are also sought at the private meetings between the Committee and the internalauditors, as well as during regular private meetings between the Chairman of the Committee and theGroup-wide Internal Audit Director.

The Committee assesses the effectiveness of the internal audit function by means of regularreviews, some of them carried out by external advisers, and through ongoing dialogue with theGroup-wide Internal Audit Director. External reviews of internal audit arrangements and standards werealso conducted in 2006 and 2007 to ensure that the activities and resources of the function are mosteffectively organized to support the oversight responsibilities of the Committee. These reviews,performed by Deloitte, confirmed that the internal audit function complies with the Institute of InternalAuditors’ international standards for the professional practice of internal auditing and is operatingeffectively.

External audit

The main details of the Group Audit Committee’s responsibilities in respect of the external audit areset out in Item 16c on page 208.

Review of Committee effectiveness

During the year, the Committee undertook a formal review of its own effectiveness, conducted byan independent consultant who prepared a report on the findings and presented this to the Committeeat its meeting in October. Recommendations to improve processes identified by the review werediscussed by members, and improvements are being implemented during 2008. The Committee issatisfied, based on the findings of this review, that it had been operating as an effective auditcommittee, meeting all applicable legal and regulatory requirements. Further reviews of the effectiveness

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of the Committee will be undertaken regularly, and will from time to time be conducted by externalconsultants.

Remuneration Committee

Role of the Committee

The Remuneration Committee (the ‘‘Committee’’) determines the remuneration packages of theChairman and executive directors. It also agrees the principles and monitors the level and structure ofcompensation for a defined population of senior management as determined by the Board.

Except in relation to the compensation of the Group Chief Executive, when only the Chairman isconsulted, the Committee consults the Chairman and the Group Chief Executive about the Committee’sproposals relating to the compensation of all executive directors. The Committee has access toprofessional advice inside and outside the Company.

The Committee has formal terms of reference set by the Board, which are reviewed regularly, andwhich are available on our website at http://www.prudential.co.uk/prudential-plc/aboutpru/corporategovernance/. Alternatively, copies may be obtained upon request from the Company Secretary,at the Company’s registered office.

Membership

The Committee is comprised exclusively of independent non-executive directors of the Company, asset out below:

Bridget Macaskill (Chairman)Keki Dadiseth FCAMichael GarrettJames Ross (from January 1, 2008)

Full biographical details of the members of the Committee, including their relevant experience areset out in their biographies on pages 157 and 158.

Meetings

The Committee normally has scheduled meetings at least four times a year and a number ofadditional meetings, as required, to review compensation policy and the application of that policy. Whilethe Chairman and Group Chief Executive are not members, they attend meetings unless they have aconflict of interest. During 2007, a total of seven Committee meetings were held.

Nomination Committee

Role of the Committee

The Nomination Committee (the ‘‘Committee’’), in consultation with the Board, evaluates thebalance of skills, knowledge and experience on the Board and identifies the role and capabilitiesrequired at any given time, taking into account the Group’s business. Candidates are considered onmerit against those criteria, and the Committee makes recommendations to the Board regarding suitablecandidates for appointments. In appropriate cases, search consultants are used to identify candidates.

The Committee has formal terms of reference set by the Board, which are reviewed regularly, andwhich are available on our website at http://www.prudential.co.uk/prudential-plc/aboutpru/corporategovernance/. Alternatively, copies may be obtained upon request from the Company Secretary,at the Company’s registered office.

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Membership

The Committee is comprised of independent non-executive directors and the Chairman, as set outbelow:

Sir David Clementi FCA MBA (Chairman)Bridget MacaskillJames Ross

Meetings

The Committee meets as required to consider candidates for appointment to the Board and to makerecommendations to the Board in respect of those candidates. The Group Chief Executive is closelyinvolved in the work of the Committee and is invited to attend and contribute to meetings.

During 2007, the Committee met formally twice. The members of the Committee discussedcandidates on a number of other occasions throughout the year, as required by the recruitment process.The Chairman also updates the full Board on Committee matters on a regular basis. During the year, theCommittee recommended to the Board the appointment of Sir Winfried Bischoff and Ann Godbehere asnon-executive directors, who were appointed by the Board on August 2, 2007, and the appointment ofTidjane Thiam as an executive director, on March 25, 2008. Full biographical details of these newdirectors are set out on pages 155 to 158.

The process of evaluating the skills and composition of the Board is ongoing, and is kept underregular review in order to ensure appropriate plans for succession to the Board are in place. During theyear, the Committee continued the search for additional non-executive directors, which is an ongoingprocess, and employed professional search consultants to oversee the initial phase.

NYSE Corporate Governance Rules compared to Prudential plc’s Corporate GovernancePractice

Pursuant to NYSE rule 303A Prudential has disclosed the differences between the NYSE CorporateGovernance Rules and its Corporate Governance Practice on its website athttp://www.prudential.co.uk/prudential-plc/aboutpru/nyse_corpgov/

Employees

The average numbers of staff employed by the Prudential group, excluding employees of theVenture investment subsidiaries of the PAC with-profits fund, for the following periods were:

2007 2006 2005 2004

UK operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,502 10,914 10,708 10,849US operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,123 2,863 2,588 2,589Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,807 12,114 9,652 8,277

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,432 25,891 22,948 21,715

At December 31, 2007, Prudential employed 29,172 persons. Of the 29,172 employees,approximately 25 per cent were located in the United Kingdom and 64 per cent in Asia and 11 per centin the United States. In the United Kingdom at December 31, 2007, Prudential had 845 employeespaying union subscriptions through the payroll. At December 31, 2007, Prudential had 383 temporaryemployees in the United Kingdom and 767 in Asia and 69 in the United States. At December 31, 2007,Prudential had 229 fixed term contractors in the United Kingdom, 78 in the United States and 640 inAsia.

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Item 7. Major Shareholders and Related Party Transactions

Major Shareholders

The UK Listing Authority Disclosure and Transparency Rules provide that a person or corporateentity that acquires an interest of 3 per cent or more in Prudential ordinary shares is required to notifyPrudential of that interest. If such interest subsequently reaches, exceeds or falls below a wholepercentage point, this must also be notified. Similarly, a notification is required once the interest fallsbelow 3 per cent. At March 31, 2008 Prudential had received the following notifications:

Significant Changes in Ownership

In February 2005, Barclays PLC notified Prudential that it had a notifiable interest in 79,033,599ordinary shares, or 3.33 per cent of Prudential’s ordinary share capital, and subsequently, also inFebruary 2005, that its interest had ceased to be notifiable. In March 2005, Prudential received anotification from Cater Allen International Limited that it had a notifiable interest in 88,640,496 ordinaryshares, or 3.73 per cent of Prudential’s ordinary share capital, and subsequently, also in March 2005, itnotified Prudential that its interest had ceased to be notifiable. Also in March 2005, Prudential receivednotifications from Lehman Brothers International (Europe) that it had a notifiable interest in 99,067,148ordinary shares, or 4.17 per cent, and subsequently that that interest had decreased to 75,591,074ordinary shares, or 3.18 per cent of the ordinary share capital, and finally, also in March 2005, that itsinterest had ceased to be notifiable. In April 2005, Barclays PLC notified Prudential that it had aninterest in 94,041,936 ordinary shares, or 3.96 per cent of the ordinary share capital, and later in April2005 that its interest had ceased to be notifiable. In July 2005, Fidelity Investments notified Prudentialthat it had an interest in 72,441,901 ordinary shares, or 3.04 per cent of the ordinary share capital. InAugust 2005, Barclays PLC notified Prudential that it had an interest in 73,951,823 ordinary shares, or3.10 per cent of the ordinary share capital. Also in August 2005, Deutsche Bank AG notified Prudentialthat it had an interest in 77,713,900 ordinary shares, or 3.26 per cent of the ordinary share capital, andlater in August 2005 that its interest had ceased to be notifiable. In November 2005, UBS AG notifiedPrudential that it had an interest in 241,298,813 ordinary shares, or 10.11 per cent of the ordinaryshare capital, and in December 2005 that its interest had ceased to be notifiable. Also in December2005, Prudential received notification from Fidelity Investments that its interest had ceased to benotifiable.

In February 2006, Fidelity Investments notified Prudential that it had an interest in 75,706,390ordinary shares, or 3.13 per cent of the ordinary share capital, and later in December 2006 that itsinterest had ceased to be notifiable. In March 2006, UBS AG notified Prudential that it had an interest in75,530,091 ordinary shares, or 3.04 per cent of the ordinary share capital, and later in March 2006 thatit had an interest in 250,259,483 ordinary shares, or 10.33 per cent of the ordinary share capital. Alsoin March 2006, Prudential received notification from Lehman Brothers International (Europe) of aninterest in 131,384,250 ordinary shares, or 5.42 per cent of the ordinary share capital. In April 2006,Prudential received notifications from UBS AG and Lehman Brothers International (Europe) that theirinterests had ceased to be notifiable. In August 2006, Barclays PLC notified Prudential that it had aninterest in 74,326,719 ordinary shares, or 3.06 per cent of the ordinary share capital, and subsequentlythat its interest had increased to 122,896,820 ordinary shares, or 5.06 per cent of the ordinary sharecapital, and later in August 2006 that its interest had ceased to be notifiable. Also in August 2006,Lehman Brothers International (Europe) informed Prudential that it was interested in 90,397,085 of itsordinary shares, or 3.73 per cent of its ordinary share capital. Further notifications were received fromLehman Brothers International (Europe) in August 2006 informing the Company that it had an interest in126,451,077 of Prudential’s ordinary shares, or 5.22 per cent of its ordinary share capital, and thenagain that it had an interest in 167,540,854 of Prudential’s ordinary shares, or 6.92 per cent of itsordinary share capital and subsequently that its interest had decreased to 101,257,449 of Prudential’sordinary shares, or 4.17 per cent of its ordinary share capital. Subsequently in August 2006 Lehman

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Brothers International (Europe) informed Prudential that it had ceased to have a notifiable interest inPrudential’s ordinary share capital. In October 2006, Barclays PLC notified Prudential that it had aninterest in 73,499,119 ordinary shares, or 3.025 per cent of the ordinary share capital.

In February 2007, Legal and General Investment Management Limited notified Prudential that it hadan interest in 110,232,362 ordinary shares, or 4.50 per cent of the ordinary share capital, andsubsequently in April 2007 that its interest had increased to 124,077,012 of Prudential’s ordinary shares,or 5.07 per cent of its ordinary share capital. In April 2007, Cater Allen International Limited notifiedPrudential that it had an interest in 75,255,755 ordinary shares, or 3.08 per cent of the ordinary sharecapital, and subsequently later in April 2007 that its interest had ceased to be notifiable. In June 2007,Legal and General Investment Management Limited notified Prudential that it had decreased its interestto 111,828,445 ordinary shares, or 4.54 per cent of the ordinary share capital, and subsequently in July2007 that its interest had increased to 124,001,002 of Prudential’s ordinary shares, or 5.04 per cent ofits ordinary share capital. In August 2007, Cater Allen International Limited notified Prudential that ithad an interest in 90,786,038 ordinary shares, or 3.69 per cent of the ordinary share capital, andsubsequently later in August 2007 that its interest had ceased to be notifiable. In August 2007, LehmanBrothers International (Europe) notified Prudential that it had an interest in 74,088,460 ordinary shares,or 3.01 per cent of the ordinary share capital, and subsequently later in September 2007 that its interesthad ceased to be notifiable. In November 2007, Legal and General Investment Management Limitednotified Prudential that it had increased its interest to 124,463,521 ordinary shares, or 5.04 per cent ofthe ordinary share capital, and subsequently in December 2007 that its interest had decreased to123,272,102 of Prudential’s ordinary shares, or 4.99 per cent of its ordinary share capital, and had thenincreased to 127,877,621 of Prudential’s ordinary shares, or 5.17 per cent of its ordinary share capital.

Table: Major shareholders at March 31, 2008

Shareholder Shareholding % of share capital Date advised

Barclays PLC . . . . . . . . . . . . . . 73,499,119 3.025% October 2006Legal and General Investment

Management Limited . . . . . . . 127,877,621 5.17% December 2007

Major shareholders of Prudential have the same voting rights per share as other shareholders. SeeItem 10, ‘‘Additional Information—Memorandum and Articles of Association—Voting Rights’’.

As of March 31, 2008, there were 125 shareholders holding Prudential ordinary shares in theUnited States. These shares represented approximately 0.011 per cent of Prudential’s issued ordinaryshare capital. As of March 31, 2008 there were 39 registered Prudential ADR holders. The sharesrepresented by these ADRs amounted to approximately 1.95 per cent of Prudential’s issued ordinaryshare capital.

Prudential does not know of any arrangements which may at a subsequent date result in a changeof control of Prudential.

Related Party Transactions

Transactions between the Company and its subsidiaries are eliminated on consolidation.

In addition, the Company has transactions and outstanding balances with certain unit trusts, OEICs,collateralized debt obligations and similar entities which are not consolidated and where a Groupcompany acts as manager. These entities are regarded as related parties for the purposes of IAS 24. Thebalances are included in the Group’s balance sheet at fair value or amortized cost in accordance withtheir IAS 39 classifications. The transactions are included in the income statement and include amountspaid on issue of shares or units, amounts received on cancellation of shares or units and paid in respectof the periodic charge and administration fee.

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Various executive officers and directors of Prudential may from time to time purchase insurance,asset management or annuity products, or be granted mortgages or credit card facilities marketed byPrudential Group companies in the ordinary course of business on substantially the same terms,including interest rates and security requirements, as those prevailing at the time for comparabletransactions with other persons.

Apart from the disclosed transactions discussed above and in Item 6 ‘‘Directors, Senior Managementand Employees’’, no director had an interest in shares, transactions or arrangements that requiresdisclosure under applicable rules and regulations.

In 2007, prior to disposal of Egg, three (2006: three) directors had credit cards with thediscontinued banking operations. In 2007 and 2006, other transactions with directors were de-minimisboth by virtue of their size and in the context of the directors’ financial positions. As indicated above,all of the above noted transactions are on terms equivalent to those that prevail in arm’s lengthtransactions.

Item 8. Financial Information

See Item 18, ‘‘Financial Statements’’.

Item 9. The Offer and Listing

Comparative Market Price Data

The tables below set forth for the periods indicated the highest and lowest closing middle-marketquotations for Prudential ordinary shares, as derived from the Daily Official List of the London StockExchange, and the actual ADS high and low closing sale prices on the New York Stock Exchange afterthat date.

PrudentialOrdinary Prudential ADSShares Actual

Year High Low High Low

(pence) (US Dollars)

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 281 17.05 9.462004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 533 386 20.29 14.652005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 552 445 19.75 16.522006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743.5 538.5 28.18 19.612007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810 619 33.18 24.77

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PrudentialOrdinary Prudential ADSShares Actual

Quarter High Low High Low

(pence) (US Dollars)

2006First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744 550 26.32 19.10Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 677.5 538.5 24.84 19.81Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 663.5 546 24.96 20.16Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714.5 623 28.18 23.51

2007First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 742.5 642.5 29.49 24.77Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 810 703 33.18 28.58Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 751 620 30.80 25.24Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 784.5 619 32.81 25.62

2008First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714 562.5 28.57 23.32

PrudentialOrdinary Prudential ADSShares Actual

Month High Low High Low

(pence) (US Dollars)

November 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 753.5 619 31.80 25.62December 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 725 646.5 29.56 26.51January 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 714 574 28.57 23.61February 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 658.5 583.5 26.42 23.32March 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 672 562.5 26.85 24.03April 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 708 646.5 28.26 25.85

Market Data

Prudential ordinary shares are listed on the Official List of the UK Listing Authority and traded onthe London Stock Exchange under the symbol ‘‘PRU’’. Prudential ADSs have been listed for trading onthe New York Stock Exchange since June 28, 2000 under the symbol ‘‘PUK’’.

Item 10. Additional Information

Memorandum and Articles of Association

Prudential plc is incorporated and registered in England and Wales, under registerednumber 1397169. Prudential’s corporate objects are extensive, as more fully set out in clause 4 ofPrudential’s Memorandum of Association.

The following is a summary of both the rights of Prudential shareholders and certain provisions ofPrudential’s Memorandum and Articles of Association. Rights of Prudential shareholders are set out inPrudential’s Memorandum and Articles of Association or are provided for by applicable English law.Because it is a summary, it does not contain all the information that is included in Prudential’sMemorandum and Articles of Association. A complete copy of Prudential’s Memorandum and Articles ofAssociation, adopted at the Annual General Meeting on May 15, 2008 is filed as an exhibit to thisForm 20-F. In addition, these documents may be viewed on Prudential’s website at:http://www.prudential.co.uk/prudential-plc/aboutpru/memorandum/

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Share capital

On December 31, 2007, Prudential’s issued share capital consisted of 2,470,017,240 ordinaryshares of £0.05 each, all fully paid up and listed on the London Stock Exchange. Prudential also hasAmerican Depositary Shares referenced to its ordinary shares, issued under a depositary agreement withJP Morgan, that are listed on the New York Stock Exchange.

The issued share capital of Prudential is not currently divided into different classes of shares,however, the authorized share capital consists of 4,000,000,000 ordinary shares of £0.05 each,2,000,000,000 Sterling Preference Shares of £0.01 each, 2,000,000,000 Dollar Preference Shares of$0.01 each, and 2,000,000,000 Euro Preference Shares of e0.01 each. To date, no preference shareshave been issued.

The Board of directors shall determine whether the preference shares are to be redeemable, theirdividend rights, their rights to a return of capital or to share in the assets of the Company on a windingup or liquidation and their rights to attend and vote at general meetings of the Company prior to thedate on which the preference shares are allotted. If the Board of directors determines prior to anyallotment date that the shares are to be redeemable, on redemption the holder of a preference shareshall be paid the aggregate of the nominal amount of such preference share, any premium paid by theshareholder on allotment and, if the directors so decide, a redemption premium which shall becalculated in accordance with a formula chosen by the Board of directors from a selection set out inPrudential’s Articles of Association. No dividend will be payable after the date of redemption of anypreference share but dividends accrued at such date will be payable.

The Board is restricted from capitalizing any amounts available for distribution in respect of anyseries or class of preference shares without the written consent of the holders of at least three-quartersin nominal value, or a special resolution passed at a general meeting of the holders of the class or seriesof preference shares if to do so would mean that the aggregate of the amounts so capitalized would beless than the multiple, if any, determined by the Board of the aggregate amount of the dividendspayable in the twelve-month period following the capitalization on the series or class of preferenceshares and on any other preference shares in issue which rank pari passu in relation to participation inprofits.

Dividends and other distributions

Under English law, Prudential may pay dividends only if distributable profits are available for thatpurpose. Distributable profits are accumulated, realized profits not previously distributed or capitalized,less accumulated, realized losses not previously written off in a reduction or reorganization of capital.Even if distributable profits are available, Prudential may only pay dividends if the amount of its netassets is not less than the aggregate of its called-up share capital and undistributable reserves, including,for example, the share premium account, and the payment of the dividend does not reduce the amountof the net assets to less than that aggregate. Subject to these restrictions, Prudential’s directors mayrecommend to ordinary shareholders that a final dividend be declared, recommend the amount of anysuch dividend, determine whether to pay a distribution by way of an interim dividend, and the amountof any such interim dividend out of the profits of the Company, but must take into account Prudential’sfinancial position. Final dividends to shareholders are recognised as a liability when shareholder approvalis obtained; interim dividends are recognised as a liability when directors resolve to pay them. Prudentialalso has authorized preference shares, the terms of which as to redemption and rights to the profits ofthe Company available for dividend and rights to a return of capital or to share in the surplus assets ofthe Company on a winding up or liquidation will be determined by the directors prior to each tranche ofpreference shares being issued. Subject to any such special rights attaching to preference shares inissue, the profits available for distribution and resolved to be distributed are distributed to the ordinaryshareholders. Currently, there are no preference shares in issue.

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Prudential’s directors or the Company also determine the date on which Prudential pays dividends.Prudential pays dividends to the shareholders on the register on the record date, which the directors orthe Company determine, in proportion to the number of shares that those shareholders hold. There areno fixed dates on which entitlements to dividends arise. Interest is not payable on dividends or otheramounts payable in respect of shares.

Prudential’s directors have the discretion to offer shareholders the right to elect to receiveadditional shares (credited as fully paid) instead of all or any part of a cash dividend. The aggregatevalue of additional shares that a shareholder may receive under such an election is as nearly as possibleequal to (but not greater than) the cash amount the shareholder would have received. Prudential doesnot issue fractions of shares and Prudential’s directors may make such provision as they thinkappropriate to deal with any fractional entitlements. Prudential’s directors may exclude shareholdersfrom the right to receive shares instead of cash dividends if Prudential’s directors believe that extendingthe election to such shareholders would violate the laws of any territory or for any other reason thedirectors consider in their absolute discretion appropriate.

If a shareholder does not claim a dividend within 12 years of such dividend becoming due forpayment, such shareholder forfeits it. Such unclaimed amounts may be invested or otherwise used forPrudential’s benefit.

Shareholder meetings

English company law provides for shareholders to exercise their power to decide on corporatematters at general meetings. In accordance with English company law, the Company is required to calland hold annual general meetings. At annual general meetings, shareholders receive and consider thestatutory accounts and the reports by the auditor and the directors, approve the directors’ remunerationreport, elect and re-elect directors, declare final dividends, approve the appointment of Prudential’sauditor and determine, or authorize the directors to determine its remuneration, and transact any otherbusiness which ought to be transacted at a general meeting, either under the Articles of Association orEnglish company law generally. General meetings to consider specific matters may be held at thediscretion of Prudential’s directors and must be convened, in accordance with English company law,following the written request of shareholders representing at least one-tenth of the voting rights of theissued and paid-up share capital. The quorum required under Prudential’s Articles of Association for ageneral meeting is two shareholders present in person or by proxy.

Voting rights

Voting at any meeting of shareholders is by show of hands unless a poll (meaning a vote by thenumber of shares held rather than by a show of hands) is demanded as described below. On a show ofhands every shareholder holding ordinary shares who is present in person, or a duly appointed proxy orin the case of a corporation, its duly authorized corporate representative, has one vote. On a poll everyshareholder who is present in person or by proxy and every duly authorized corporate representativehas one vote for every share held. Only the holders of fully paid shares are allowed to attend and becounted in the quorum at meetings, and to vote. If more than one joint shareholder votes, only the voteof the shareholder whose name appears first in the register is counted. A shareholder whoseshareholding is registered in the name of a nominee may only attend and vote at a general meeting ifappointed by his or her nominee as a proxy or a corporate representative.

Resolutions of Prudential’s shareholders generally require the approval of a majority of theshareholders to be passed. Such resolutions, referred to as ordinary resolutions, require:

• on a show of hands, a majority in number of the shareholders present and voting in person or byduly appointed proxies or (in the case of corporate shareholders) by authorized corporaterepresentatives to vote in favor, or

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• on a poll, more than 50 per cent of the votes cast to be in favor.

Some resolutions, referred to as special resolutions, such as a resolution to amend theMemorandum and Articles of Association, require a 75 per cent majority. Such special resolutionsrequire:

• on a show of hands, at least 75 per cent of the shareholders present and voting in person or byduly appointed proxies or (in the case of corporate shareholders) by authorized corporaterepresentative to vote in favor, or

• on a poll, at least 75 per cent of the votes cast to be in favor.

Any shareholder who is entitled to attend and vote at a general meeting may appoint one or moreproxies to attend and vote at the meeting on his or her behalf.

The following persons may demand a poll:

• the chairman of the meeting,

• at least five shareholders present in person, by corporate representative or by proxy having theright to vote on the resolution,

• any shareholder or shareholders present in person, by corporate representative or by proxy andrepresenting at least 10 per cent of the total voting rights of all shareholders having the right tovote on the resolution, or

• any shareholder or shareholders present in person, by corporate representative or by proxy andholding shares conferring a right to vote on the resolution on which an aggregate sum has beenpaid up equal to at least 10 per cent of the total sum paid up on all shares conferring that right.

Voting rights of Prudential’s preference shares will be determined by the directors prior to eachtranche of preference shares being issued. Currently, there are no preference shares in issue.

Transfer of shares

Transfers of shares may be made by an instrument of transfer. An instrument of transfer must besigned by or on behalf of the transferor and, unless the share is fully paid, by or on behalf of thetransferee. The transferor remains the holder of the relevant shares until the name of the transferee isentered in the share register. Transfers of shares may also be made by a computer-based system(currently the CREST system) and transferred without a written instrument in accordance with Englishcompany law. The directors may in certain circumstances refuse to register transfers of shares, but onlyif such refusal does not prevent dealings in the shares from taking place on an open and proper basis. Ifthe directors refuse to register a transfer they must send the transferee notice of the refusal within twomonths stating the reason(s) for such refusal.

Changes in share capital

Increases in authorized share capital may only take place after approval by shareholders by ordinaryresolution. The class and other rights attaching to such new shares may be determined by resolution ofthe shareholders or may be delegated by the shareholders to the directors. Prudential’s directors mayissue and allot such new shares if authorized to do so by the shareholders. In addition to any increase,the following changes in share capital may only take place after approval by an ordinary resolution ofthe shareholders:

• share consolidations,

• subdivisions of shares, and

• cancellations of shares that have not been taken or agreed to be taken by any person.

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Reductions in Prudential’s issued share capital and share premium account must be approved by aspecial resolution of the shareholders and must be confirmed by an order of the court. Purchases ofPrudential’s own shares also require authority to be granted by a special resolution passed byshareholders.

Variation of rights

If the share capital is divided into different classes of shares, the rights of any class of shares maybe changed or taken away only if such measure is approved by a special resolution passed at a separatemeeting of the members of that class, or with the written consent of at least three quarters of themembers of that class. Two persons holding or representing by proxy at least one-third in nominalamount of the issued shares of the class must be present at such a meeting in person or by proxy toconstitute a quorum.

The Board may not authorize, create or increase the amount of, any shares of any class or anysecurity convertible into shares of any class or any security which is convertible into shares of any classranking, as regards rights to participate in the profits or assets in the Company, in priority to a series orclass of preference shares without the consent in writing of at least three-quarters in nominal value of,or the sanction of a special resolution of the holders of such series or class of preference shares.

Lien

Prudential may not have a lien on fully paid shares.

Accidental omission to give notice

Accidental omission to send notice of a meeting to any person entitled to receive it, or thenon-receipt for any reason of any such notice, shall not invalidate the proceedings of that meeting.

Shareholders resident abroad

There are no limitations on non-resident or foreign shareholders’ rights to own Prudential securitiesor exercise voting rights where such rights are given under English company law.

Winding-up

Prudential is subject to the general insolvency law applicable to UK companies, which is describedin Item 4, ‘‘Information on the Company—Supervision and Regulation of Prudential—UK Supervision andRegulation—Application of 2000 Act Regulatory Regime to Prudential—Regulation of InsuranceBusiness—Winding-up Rules’’.

Board of directors

Prudential’s Board of directors manages Prudential’s business. However, Prudential’s shareholdersmust approve certain matters, such as changes to the share capital and the election and re-election ofdirectors. Directors are appointed subject to Prudential’s Articles of Association. Prudential’s Board ofdirectors may fill vacancies and appoint additional directors who hold office until the next AnnualGeneral Meeting. The Articles of Association require that each director must have beneficial ownershipof a given number of ordinary shares. The number of shares is determined by ordinary resolution at ageneral meeting and is currently 2,500. The minimum number of directors is eight and the maximumnumber is twenty. Prudential may vary the limits on the number of directors by special resolution. Witheffect from the conclusion of the Annual General Meeting held on May 15, 2008 there are fifteenmembers on Prudential’s Board of directors.

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At every Annual General Meeting, any director: who has been appointed by the Board since thelast Annual General Meeting, or who held office at the time of the two preceding Annual GeneralMeetings and who did not retire at either of them, or who has held office with the Company, other thanemployment or executive office, for a continuous period of nine years or more at the date of themeeting, shall retire from office and may offer himself or herself for re-election by shareholders.Shareholders may remove any director before the end of his or her term of office by ordinary resolutionand may appoint another person in his or her place by ordinary resolution.

The directors may exercise all the powers of Prudential to borrow money and to mortgage orcharge any of its assets provided that the total amount borrowed does not, when aggregated with thetotal borrowing (which excludes, amongst other things, intra-group borrowings and amounts secured bypolicies, guarantees, bonds or contracts issued or given by Prudential or its subsidiaries in the course ofits business) of all of Prudential’s subsidiaries, exceed the aggregate of the share capital andconsolidated reserves and of one-tenth of the insurance funds of Prudential and each of its subsidiariesas shown in the most recent audited consolidated balance sheet of the Group prepared in accordancewith the UK Companies Acts.

There is no age restriction applicable to directors in Prudential’s Articles of Association.

Disclosure of interests

There are no provisions in Prudential’s Articles of Association that require persons acquiring,holding or disposing of a certain percentage of Prudential’s shares to make disclosure of their ownershippercentage. The basic disclosure requirement under Part 6 of the Financial Services and Markets Act2000 and Rule 5 of the Disclosure and Transparency Rules made by the Financial Services Authorityimposes a statutory obligation on a person to notify Prudential and the Financial Services Authority ofthe percentage of the voting rights in Prudential he or she directly or indirectly holds or controls, or hasrights over, through his or her direct or indirect holding of certain financial instruments, if thepercentage of those voting rights:

• reaches, exceeds or falls below 3% and/or any subsequent whole percentage figure as a result ofan acquisition or disposal of shares or financial instruments; or

• reaches, exceeds or falls below any such threshold as a result of any change in the number ofvoting rights attached to shares in Prudential.

The Disclosure and Transparency Rules set out in detail the circumstances in which an obligation ofdisclosure will arise, as well as certain exemptions from those obligations for specified persons. Undersection 793 of the UK Companies Act 2006, Prudential may, by notice in writing, require a person thatPrudential knows or has reasonable cause to believe is or was during the three years preceding the dateof notice interested in Prudential’s shares to indicate whether or not that is the case and, if that persondoes or did hold an interest in Prudential’s shares, to provide certain information as set out in that Act.

Where a company serves notice under the provisions described above on a person who is or wasinterested in shares of the company and that person fails to give the company the information requiredby the notice within the time specified in the notice, the company may apply to an English court for anorder directing that the shares in question be subject to restrictions prohibiting, among other things, anytransfer of those shares, the exercise of voting rights in respect of those shares and, other than inliquidation, payments in respect of those shares.

In addition, under Prudential’s Articles of Association, a shareholder may lose the right to vote hisshares if he or any other person appearing to be interested in those shares fails to comply within aprescribed period of time with such a request to give the required information with respect to past orpresent ownership or interests in those shares, or makes a statement in response to such a requestwhich is in the opinion of the directors false or misleading in any material manner. In the case of holders

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of 0.25 per cent or more of the issued share capital of Prudential (or any class of the share capital), inaddition to disenfranchisement, the sanctions that may be applied by Prudential under its Articles ofAssociation include withholding the right to receive payment of dividends on those shares, andrestrictions on transfers of those shares. In the case of holders of less than 0.25 per cent of the issuedshare capital of Prudential, the sanction is disenfranchisement alone.

The Disclosure and Transparency Rules further deal with the disclosure by certain persons,including directors, of interests in shares of the listed companies of which they are directors, and inderivatives or other financial instruments relating to those shares. The City Code on Takeovers andMergers also imposes strict disclosure requirements with regard to dealings in the securities of anofferor or offeree company on all parties to a takeover and also on their respective associates during thecourse of an offer period.

Permitted operations

Under clause 4 of Prudential’s Memorandum of Association, Prudential’s principal object is to carryon the business of an investment holding company and, for that purpose to acquire and hold (for itselfor as trustee or nominee) securities in any part of the world. Further objects include providing financial,administrative and investment services in its own right and for the companies in which Prudential isinterested. In addition, the Memorandum of Association provides that each of the paragraphs setting outits objects is not limited by reference to or inference from the terms of any other paragraph but may beconstrued in its widest sense.

Directors’ interests in contracts

A director may hold positions with or be interested in other companies and, subject to applicablelegislation, contract with the Company or any other company in which Prudential has an interest.

A director may not vote or be counted in the quorum in relation to any resolution of the Board inrespect of any contract in which he or she has an interest. This prohibition does not, however, apply toany resolution where that interest cannot reasonably be regarded as likely to give rise to a conflict ofinterest or where that interest arises only from certain matters specified in the Articles of Association(filed as an exhibit to this Form 20-F), including the following:

• certain matters that benefit the Group (such as a guarantee, indemnity or security in respect ofmoney lent or obligations undertaken by the director at the request of or for the benefit ofPrudential or one of its subsidiaries);

• certain matters that are available to all other directors and/or employees (such as the provision tothe director of an indemnity where all other directors are being offered indemnities onsubstantially the same terms or in respect of any contract for the benefit of Group employeesunder which the director benefits in a similar manner to the employees); and

• certain matters that arise solely from the director’s interest in shares or debentures of theCompany (such as where Prudential or one of its subsidiaries is offering securities in which offerthe director is entitled to participate as a holder of securities or in respect of any contract inwhich a director is interested by virtue of his interest in securities in the Company).

The Company may by ordinary resolution suspend or relax these provisions to any extent or ratifyany contract not properly authorized by reason of a contravention of these provisions contained in itsArticles of Association.

In accordance with English company law, the Articles of Association will, from October 2008, allowthe Board to authorize any matter which would otherwise involve a director breaching his duty underthe UK Companies Act 2006 to avoid conflicts of interest or potential conflicts of interest and the

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relevant director will be obliged to conduct himself or herself in accordance with any terms imposed bythe Board in relation to such authorization.

Directors’ power to vote on own terms of appointment

A director shall not vote on or be counted in the quorum in relation to any resolution of the Boardconcerning his own appointment, or the settlement or variation of the terms or the termination of hisown appointment, as the holder of any office or place of profit with the Company or any other companyin which the Company is interested.

Directors’ remuneration

The remuneration of the executive directors and the Chairman is determined by the RemunerationCommittee, which consists of independent, non-executive directors. The remuneration of thenon-executive directors is determined by the Board. For further details see Item 6—‘‘Directors, SeniorManagement and Employees—Compensation’’.

Change of control

There is no specific provision in Prudential’s Articles of Association that would have an effect ofdelaying, deferring or preventing a change in control of Prudential and that would operate only withrespect to a merger, acquisition or corporate restructuring involving Prudential, or any of its subsidiaries.

Exclusive jurisdiction

Under Prudential’s Articles of Association, any proceeding, suit or action between a shareholder andPrudential and/or its directors arising out of or in connection with the Articles of Association orotherwise, between Prudential and any of its directors (to the fullest extent permitted by law), betweena shareholder and Prudential’s professional service providers and/or between Prudential and Prudential’sprofessional service providers (to the extent such proceeding, suit or action arises in connection with aproceeding, suit or action between a shareholder and such professional service provider) may only bebrought in the courts of England and Wales.

Material Contracts

Prudential operates two primary long-term incentive plans to provide rewards to executive directorsand most other executive officers. All executive directors receive awards under the Group PerformanceShare Plan which is contingent upon the achievement of pre-determined returns to shareholders.Executive directors with regional responsibilities also receive awards under the Business UnitPerformance Plan, contingent upon the financial performance of the relevant region. See Item 6,‘‘Directors, Senior Management and Employees—Compensation—Senior Executives’ Long-term IncentivePlans’’.

At the Annual General Meeting held on May 15, 2008 shareholders approved a new long termincentive plan, the M&G Executive Long Term Incentive Plan, under which the Chief Executive of M&Gwill be eligible to receive awards of phantom shares. The payout of any award will be contingent uponthe financial performance of M&G.

Prudential has also entered into service contracts with executive directors relating to theiremployment in such capacity. See Item 6, ‘‘Directors, Senior Management and Employees—ServiceContracts’’.

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Exchange Controls

Other than the requirement to obtain the consent of HM Treasury to certain corporate actions,there are currently no UK laws, decrees or regulations that restrict the export or import of capital,including, but not limited to, foreign exchange controls, or that affect the remittance of dividends orother payments to non-UK residents or to US holders of Prudential’s securities, except as otherwise setforth under ‘‘—Taxation’’ in this section.

Taxation

The following is a summary, under current law, of the principal UK tax and US federal income taxconsiderations relating to an investment by a US taxpayer in Prudential ordinary shares or ADSs. Thissummary applies to you only if:

• you are an individual US citizen or resident, a US corporation, or otherwise subject to US federalincome tax on a net income basis in respect of the Prudential ordinary shares or ADSs;

• you hold Prudential ordinary shares or ADSs as a capital asset for tax purposes; and

• if you are an individual, you are neither resident nor ordinarily resident in the United Kingdomfor UK tax purposes, and do not hold Prudential ordinary shares or ADSs for the purposes of atrade, profession, or vocation that you carry on in the United Kingdom through a branch oragency or if you are a corporation, you are not resident in the UK for UK tax purposes and donot hold the securities for the purpose of a trade carried on in the United Kingdom through apermanent establishment in the United Kingdom.

This summary does not purport to be a comprehensive description of all of the tax considerationsthat may be relevant to any particular investor, and does not address the tax treatment of investors thatare subject to special rules. Prudential has assumed that you are familiar with the tax rules applicable toinvestments in securities generally and with any special rules to which you may be subject. You shouldconsult your own tax advisors regarding the tax consequences of the ownership of Prudential ordinaryshares or ADSs in the context of your own particular circumstances.

The discussion is based on laws, treaties, judicial decisions, and regulatory interpretations in effecton the date hereof, all of which are subject to change.

Beneficial owners of ADSs will be treated as owners of the underlying Prudential ordinary sharesfor US federal income tax purposes and for purposes of the July 24, 2001 Treaty between the UnitedStates and the United Kingdom. Deposits and withdrawals of Prudential ordinary shares in exchange forADSs will not result in the realization of gain or loss for US federal income tax purposes.

UK Taxation of Dividends

Under current UK tax law, no tax is required to be withheld in the United Kingdom at source fromcash dividends paid to US resident holders.

UK Taxation of Capital Gains

A holder of Prudential ordinary shares or ADSs who for UK tax purposes is a US corporation that isnot resident in the United Kingdom will not be liable for UK taxation on capital gains realized on thedisposal of Prudential ordinary shares or ADSs unless at the time of disposal:

• the holder carries on a trade in the United Kingdom through a permanent establishment in theUnited Kingdom, and

• the Prudential ordinary shares or ADSs are or have been used, held or acquired for use by or forthe purposes of such trade or permanent establishment.

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Subject to the comments in the following paragraph, a holder of Prudential ordinary shares or ADSswho, for UK tax purposes, is an individual who is neither resident nor not ordinarily resident in theUnited Kingdom will not be liable for UK taxation on capital gains realized on the disposal of Prudentialordinary shares or ADSs unless at the time of the disposal:

• the holder carries on a trade, profession or vocation in the United Kingdom through a branch oragency, and

• the Prudential ordinary shares or ADSs are or have been used, held, or acquired for use by or forthe purposes of such trade, profession, or vocation, or for the purposes of such branch oragency.

A holder of Prudential ordinary shares or ADSs who (1) is an individual who has ceased to be bothresident and ordinarily resident for UK tax purposes in the United Kingdom, (2) was both resident andordinarily resident for UK tax purposes in the United Kingdom for at least four out of the seven UK taxyears immediately preceding the year in which he or she ceased to be both resident and ordinarilyresident in the United Kingdom, (3) continues to be neither resident nor ordinarily resident in theUnited Kingdom for a period of less than five tax years and (4) disposes of their Prudential ordinaryshares or ADSs during that period of non-residence may also be liable, upon becoming both residentand ordinarily resident in the United Kingdom again for UK tax on capital gains, subject to any availableexemption or relief, even though he or she was not resident or ordinarily resident in the UnitedKingdom at the time of the disposal.

UK Inheritance Tax

Prudential ordinary shares are assets situated in the United Kingdom for the purposes of UKinheritance tax (the equivalent of US estate and gift tax). Prudential ADSs are likely to be treated in thesame manner as the underlying Prudential ordinary shares are situated in the United Kingdom. Subjectto the discussion of the UK-US estate tax treaty in the next paragraph, UK inheritance tax may apply ifan individual who holds Prudential ordinary shares or ADSs gifts them or dies even if he or she isneither domiciled in the United Kingdom nor deemed to be domiciled there under UK law. Forinheritance tax purposes, a transfer of Prudential ordinary shares or ADSs at less than full market valuemay be treated as a gift for these purposes. Special inheritance tax rules apply (1) to gifts if the donorretains some benefit, (2) to close companies and (3) to trustees of settlements.

However, as a result of the UK-US estate tax treaty, Prudential ordinary shares or ADSs held by anindividual who is domiciled in the United States for the purposes of the UK-US estate tax treaty andwho is not a UK national will not be subject to UK inheritance tax on that individual’s death or on a giftof the Prudential ordinary shares or ADSs unless the Prudential ordinary shares or ADSs:

• are part of the business property of a permanent establishment of an enterprise in the UnitedKingdom, or

• pertain to a fixed base in the UK used for the performance of independent personal services.

The UK-US estate tax treaty provides a credit mechanism if the Prudential ordinary shares or ADSsare subject to both UK inheritance tax and to US estate and gift tax.

UK Stamp Duty and Stamp Duty Reserve Tax

UK stamp duty is payable on a transfer of, and UK stamp duty reserve tax is payable upon atransfer or issue of, Prudential ordinary shares to the depositary of Prudential ordinary shares that isresponsible for issuing ADSs (the ‘‘ADS Depository’’), or a nominee or agent of the ADS depositary, inexchange for American Depository Receipts (‘‘ADRs’’) representing ADSs. For this purpose, the currentrate of stamp duty and stamp duty reserve tax is 1.5 per cent (rounded up, in the case of stamp duty,to the nearest £5). Where Prudential ordinary shares are transferred to the ADS depository, the rate is

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applied, in each case, to the amount or value of the consideration given for the Prudential ordinaryshares or, in some circumstances where consideration is not in money, to the value of the Prudentialordinary shares at the time of transfer. To the extent that such stamp duty is paid on any such transferof Prudential ordinary shares, no stamp duty reserve tax should be payable on that transfer. WherePrudential ordinary shares are issued to the ADS depository the rate is applied, in such case, to theissue price.

Provided that the instrument of transfer is not executed in the United Kingdom and remains at allsubsequent times outside the United Kingdom, no UK stamp duty will be required to be paid on anytransfer of Prudential ADRs representing ADSs. A transfer of Prudential ADRs representing ADSs willnot give rise to a liability to stamp duty reserve tax.

A transfer for value of Prudential ordinary shares, as opposed to ADSs, will generally give rise to acharge to UK stamp duty or stamp duty reserve tax, other than where the amount or value of theconsideration for the transfer is £1,000 or under and the transfer instrument is certified at £1,000 (a‘‘Low Value Transaction’’) should the Finance Bill 2008 be enacted in the form in which it was releasedon 27 March 2008, at the rate of 0.5 per cent (rounded up, in the case of stamp duty, to the nearest£5). The rate is applied to the price payable for the relevant Prudential ordinary shares. To the extentthat stamp duty is paid on a transfer of Prudential ordinary shares, no stamp duty reserve tax should bepayable on that transfer. A transfer of ordinary shares from a nominee to its beneficial owner, includinga transfer of underlying Prudential ordinary shares from the ADS depositary or its nominee to an ADSholder, is subject to stamp duty, other than where the amount or value of the consideration for thetransfer is £1,000 or under and the transfer instrument is certified at £1,000 (a ‘‘Low Value Transaction’’)should the Finance Bill 2008 be enacted in the form in which it was released on 27 March 2008, at thefixed rate of £5 per transfer and is not subject to stamp duty reserve tax.

UK stamp duty is usually paid by the purchaser. Although stamp duty reserve tax is generally theliability of the purchaser, any such tax payable on the transfer or issue of Prudential ordinary shares tothe ADS depositary or its nominee will be payable by the ADS depositary as the issuer of the ADSs. Inaccordance with the terms of the Deposit Agreement, the ADS depositary will recover an amount inrespect of such tax from the initial holders of the ADSs.

US Federal Income Tax Treatment of Distributions on Prudential Ordinary Shares or ADSs

If Prudential pays dividends, you must include those dividends in your income when you receivethem. The dividends will be treated as foreign source income. You should determine the amount of yourdividend income by converting pounds sterling into US dollars at the exchange rate in effect on the dateof your (or the depositary’s, in the case of ADSs) receipt of the dividend. Subject to certain exceptionsfor short-term and hedged positions, the US dollar amount of dividends received by an individual beforeJanuary 1, 2011 will be subject to taxation at a maximum rate of 15 per cent if the dividends are‘‘qualified dividends.’’ Dividends received with respect to the ordinary shares or ADSs will be qualifieddividends if Prudential was not, in the year prior to the year in which the dividend was paid, and is not,in the year in which the dividend is paid, a passive foreign investment company (‘‘PFIC’’). Based onPrudential’s audited financial statements and relevant market data, Prudential believes that it was nottreated as a PFIC for US federal income tax purposes with respect to its 2007 taxable year. In addition,based on Prudential’s audited financial statements and its current expectations regarding the value andnature of its assets, the sources and nature of its income, and relevant market data, Prudential does notanticipate becoming a PFIC for its 2008 taxable year.

Capital Gains

If you sell your Prudential ordinary shares or ADSs, you will recognize a capital gain or loss. A gainon the sale of Prudential ordinary shares or ADSs held for more than one year will be treated as along-term capital gain. The net long-term capital gain recognized before 2011 generally is subject to

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taxation at a maximum rate of 15 per cent. Your ability to offset capital losses against ordinary income issubject to limitations.

US Information Reporting and Backup Withholding

Under the US tax code, a US resident holder of Prudential ordinary shares or ADSs may be subject,under certain circumstances, to information reporting and possibly backup withholding with respect todividends and proceeds from the sale or other disposition of Prudential ordinary shares or ADSs, unlessthe US resident holder provides proof of an applicable exemption or correct taxpayer identificationnumber and otherwise complies with applicable requirements of the backup withholding rules. Anyamount withheld under the backup withholding rules is not additional tax and may be refunded orcredited against the US resident holder’s federal income tax liability, so long as the required informationis furnished to the IRS.

Documents on Display

Prudential is subject to the informational requirements of the Securities Exchange Act of 1934applicable to foreign private issuers. In accordance with these requirements, Prudential files its AnnualReport on Form 20-F and other documents with the Securities and Exchange Commission. You may readand copy this information at the following location:

Public Reference Room100 F Street, N.E.

Room 1580Washington, D.C. 20549

Please call the SEC at (202) 551 8090 for further information on the public reference room. Copiesof these materials can also be obtained by fax (202) 772 9295, by email to PublicInfo@sec.gov or mail atprescribed rates from the Public Reference Section of the Securities and Exchange Commission, 100 FStreet, N.E., Room 1580, Washington, D.C. 20549-0213. In addition, some of Prudential’s filings withthe Securities and Exchange Commission, including all those filed on or after November 4, 2002 areavailable on the Securities and Exchange Commission’s website at http://www.sec.gov, and on the NewYork Stock Exchange’s website at http://www.nyse.com.

Prudential also files reports and other documents with the London Stock Exchange. This informationmay be viewed on the London Stock Exchange’s website at http://www.londonstockexchange.com, andthose reports and documents not filed electronically may be viewed at the Document Viewing Facility,UK Listing Authority, Financial Services Authority, 25 The North Colonnade, Canary Wharf, LondonE14 5HS, UK. All reports and other documents filed with the London Stock Exchange are also publishedon Prudential’s website at http://www.prudential.co.uk.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

Overview

As a provider of financial services, including insurance, Prudential’s business is the managedacceptance of risk. The control procedures and systems established within the Group are designed tomanage, rather than eliminate, the risk of failure to meet business objectives. They can only providereasonable and not absolute assurance against material misstatement or loss, and focus on aligning thelevels of risk-taking with the achievement of business objectives.

The Group’s internal control processes are detailed in the Group Governance Manual. This issupported by the Group risk framework as discussed in detail in Item 4, which provides an overview ofthe Group-wide philosophy and approach to risk management. Where appropriate, more detailedpolicies and procedures have been developed at the Group and/or business unit levels. These includeGroup-wide mandatory policies on certain operational risks, including: health, safety, fraud, moneylaundering, bribery, business continuity, information security and operational security. Additionalguidelines are provided for some aspects of actuarial and finance activity.

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Prudential’s risk governance framework requires that all of the Group’s businesses and functionsestablish processes for identifying, evaluating and managing the key risks faced by the Group. The riskgovernance framework is based on the concept of ‘three lines of defense’: Risk management, riskoversight and independent assurance. Primary responsibility for strategy, performance management andrisk control lies with the Board, the Group Chief Executive and the chief executives of each businessunit. Risk oversight is provided by Group-level risk committees, the Chief Financial Officer and theGroup Risk function, working with counterparts in the business units in addition to other Group HeadOffice (‘‘GHO’’) oversight functions. Independent assurance on the Group’s and business units’ internalcontrol and risk management systems is provided by Group-wide Internal Audit reporting to the Groupand business unit audit committees.

The Group’s risk reporting framework forms an important part of the Group’s business planningprocess. Business units carry out a review of risks as part of the annual preparation of their three-yearbusiness plan. This involves an assessment of the impact and likelihood of key risks and of theeffectiveness of controls in place to manage them, and is reviewed regularly throughout the year. Inaddition, business unit dialogue meetings involving Group and business unit executive management areheld regularly to review opportunities and risks to business objectives. Any mitigation strategiesinvolving large transactions (e.g. a material derivative transaction) would be subject to scrutiny at Grouplevel before implementation.

Major risks

Specific business environmental and operational risks are discussed under Item 3, ‘‘KeyInformation—Risk Factors’’ and Item 5, ‘‘Operating and financial Review and Prospects—RiskManagement’’ and ‘‘Operating and Financial Review and Prospects—Factors Affecting Results ofOperations’’. Risks discussed under Item 4, ‘‘Information on the Company—Business of Prudential’’include ‘‘Business of Prudential—UK—Compliance’’ and ‘‘Business of Prudential—Legal Proceedings’’.

Market and financial risks

A detailed analysis of market and financial risks is provided in notes C(iii), D1(e), D2(d), D3(d) andD4(c) to the consolidated financial statement.

Currency of Investments

Prudential’s investments are generally held in the same currency as its liabilities and, accordingly,pound sterling liabilities will generally be supported by pound sterling assets and US dollar liabilities willgenerally be supported by US dollar assets. However, where Prudential believes it is appropriate, itholds some non-domestic equities in the equity portfolios in the belief that this diversifies the overallportfolio risk.

As at December 31, 2007, the Group held 19 per cent (2006: 16 per cent) of its financial assets incurrencies, mainly US dollar and Euro, other than the functional currency of the relevant business unit.

The financial assets, of which 86 per cent (2006: 90 per cent) are held by the PAC with-profitsfund, allow the PAC with-profits fund to obtain exposure to foreign equity markets.

The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainlyforward currency contracts.

Currency of Core Borrowings

Prudential is subject to certain interest rate risk and foreign exchange risk on its core borrowings.At December 31, 2007, there was £1,224 million of pounds sterling debt, £888 million, or$1,800 million, of US dollar debt and £380 million, or e520 million of Euro debt. £1,473 million of the

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core debt was at fixed rates of interest and £1,019 million has been swapped into floating rates ofinterest.

Foreign currency borrowings that have been used to provide a hedge against Group equityinvestments in overseas subsidiaries are translated at year end exchange rates and gains and losses aretaken directly to shareholders’ equity. Other foreign currency monetary items are translated at year endexchange rates with changes recognized in the income statement. Foreign currency transactions aretranslated at the spot rate prevailing at the time.

Sensitivity Analysis

Prudential is sensitive to interest rate movements, movements in the values of equities and realestate and foreign exchange fluctuations.

Sensitivity analysis with regard to the Group’s investments in debt securities, equities and realestate, and to foreign exchange fluctuations, is provided in notes D2(i), D3(i), D4(h) and E4 to theconsolidated financial statements.

Additional sensitivity analysis of the Group’s long-term debt and interests in derivatives contractshas been provided below.

Interest Rate Risk—Long-term Debt

The table below quantifies the estimated increase in fair value of long-term borrowings atDecember 31, 2007 and 2006, resulting from a 100 basis point reduction in interest rates at thosedates. The carrying value of short-term borrowings, which approximates their fair value, would not bematerially increased by a 100 basis point reduction in interest rates. Prudential believes this to be areasonably possible near-term market change for interest rates.

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December 31, 2007 December 31, 2006

Estimated EstimatedCarrying Fair Increase in Carrying Fair Increase in

Value Value Fair Value Value Value Fair Value

£m £m £m £m £m £m

Long-term borrowingsCentral companiesGuaranteed bonds, £150 million aggregate

principal amount, 9.375% due 2007 . . . . . . . . — — — 150 152 1Bonds, £249 million aggregate principal amount,

5.5% due 2009(1) . . . . . . . . . . . . . . . . . . . . . 248 248 3 248 249 5Bonds, e500 million aggregate principal amount,

5.75% due 2021(2) . . . . . . . . . . . . . . . . . . . . 365 368 13 335 357 16Bonds, £300 million aggregate principal amount,

6.875% due 2023 . . . . . . . . . . . . . . . . . . . . 300 333 35 300 350 41Bonds, £250 million aggregate principal amount,

5.875% due 2029 . . . . . . . . . . . . . . . . . . . . 249 252 31 249 271 37Bonds, £435 million aggregate principal amount,

6.125%, due 2031 . . . . . . . . . . . . . . . . . . . . 427 434 54 427 467 65Capital securities, $1,000 million 6.5% perpetual(3) . . 485 454 55 484 515 10Capital securities, $250 million 6.75% perpetual . . 124 103 1 125 131 3Capital securities, $300 million 6.5% perpetual(4) . . 154 122 2 154 156 5Medium Term Notes, e20 million, 2023(5) . . . . . . 15 15 0 13 13 0

Total central companies . . . . . . . . . . . . . . . . . . 2,367 2,329 194 2,485 2,661 183

EggBonds, £250 million aggregate principal amount,

7.5% due 2013 . . . . . . . . . . . . . . . . . . . . . . — — — 250 266 15Bonds, £200 million aggregate principal amount,

6.875% due 2021 . . . . . . . . . . . . . . . . . . . . — — — 201 212 16

Total Egg . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 451 478 31

Insurance operationsGuaranteed bonds, £100 million, principal amount,

8.5% undated subordinated . . . . . . . . . . . . . . 100 119 10 100 122 11Surplus notes, $250 million principal amount,

8.15% due 2027 . . . . . . . . . . . . . . . . . . . . . 125 147 18 127 158 17

Total long-term business . . . . . . . . . . . . . . . . . 225 266 28 227 280 28

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,592 2,595 222 3,163 3,419 242

(1) In February 2006, £1.3 million of the original bond issue of £250 million was redeemed.

(2) The e500 million 5.75 per cent borrowings have been swapped into borrowings of £333 million with interest payable at sixmonth £Libor plus 0.962 per cent.

(3) Interest on the $1,000 million 6.5 per cent borrowings was swapped into floating rate payments at three month $Libor plus0.80 per cent. In January 2008, this was swapped back into fixed rate payments at 6.5 per cent.

(4) Interest on the $300 million 6.5 per cent borrowings was swapped into floating rate payments at three month $Libor plus0.0225 per cent. In January 2008, this was swapped back into fixed rate payments at 6.5 per cent.

(5) The e20 million Medium Term Subordinated Notes were issued at 20-year Euro Constant Maturity Swap (capped at 6.5 percent). These have been swapped into borrowings of £14 million with interest payable at three month £Libor plus 1.2 percent.

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There is no impact on profit at December 31, 2007 and 2006 as a result of these reductions ininterest rates because the liabilities are recognized in the financial statements at carrying value, which isequal to their amortized cost.

Derivative Contracts

At December 31, 2007 and 2006, the net market value exposure of derivatives was a gain of£95 million and a gain of £294 million, respectively. The tables below show the sensitivity of thosederivatives, measured in terms of fair value, to equity and real estate market increases and decreases of10 per cent and to interest rate increases and decreases of 100 basis points. Prudential believes theseincreases and decreases to be reasonably possible near-term market changes. These exposures willchange as a result of ongoing portfolio and risk management activities.

December 31, 2007 December 31, 2006

10% Equity & Real 10% Equity & Real 10% Equity & Real 10% Equity & RealEstate Increase Estate Decrease Estate Increase Estate Decrease

Increase/(decrease) Fair Increase/(decrease) Increase/(decrease) Fair Increase/(decrease)in Fair Value Value in Fair Value in Fair Value Value in Fair Value

£m £m £m £m £m £m

United Kingdom—long-terminsuranceWith-profits fund

(including PAL) . (3) (133) 5 42 160 (36)Shareholder-

backedannuities . . . . 9 37 (8) 24 18 (21)

SAIF . . . . . . . . . (9) (41) 9 (12) 30 12United Kingdom—

Banking . . . . . . — — — 0 (76) 0United States—

insurance . . . . . (35) 232 59 2 162 25

Total . . . . . . . . . . (38) 95 65 56 294 (20)

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December 31, 2007 December 31, 2006

100 bp Interest 100 bp Interest 100 bp Interest 100 bp InterestRate Increase Rate Decrease Rate Increase Rate Decrease

Increase/(decrease) Fair Increase/(decrease) Increase/(decrease) Fair Increase/(decrease)in Fair Value Value in Fair Value in Fair Value Value in Fair Value

£m £m £m £m £m £m

United Kingdom—long-terminsuranceWith-profits fund

(including PAL) . (133) (133) 162 (99) 160 123Shareholder-

backedannuities . . . . (117) 37 148 (14) 18 19

SAIF . . . . . . . . . (34) (41) 65 (32) 30 66United Kingdom—

Banking . . . . . . — — — 24 (76) (24)United States—

insurance . . . . . 162 232 (115) 111 162 (94)

Total . . . . . . . . . . (122) 95 260 (10) 294 90

Long-term Insurance Contracts

At December 31, 2007 and 2006, the aggregate carrying value of total policyholder liabilities andunallocated surplus of with-profits funds net of the reinsurance share of insurance contract liabilities was£189,845 million and £177,709 million, respectively, and the fair value was estimated to be£181,267 million and £171,314 million, respectively. The fair value of the policyholder liabilities and theunallocated surplus is sensitive to changes in the fair value of investments in the with-profits fundbecause increases in the fair value of such investments would result in increases in future bonuses forthe with-profits contracts. A 10 per cent increase in the fair value of total investments would result in anincrease in the fair value of the technical provisions and the unallocated surplus of £18,127 million and£17,131 million at December 31, 2007 and 2006, respectively. Prudential believes this to be areasonably possible near-term market change for the fair value of investments.

Limitations

The above sensitivities do not consider that assets and liabilities are actively managed and may varyat the time any actual market movement occurs. There are strategies in place to minimize the exposureto market fluctuations. For example, as market indices fluctuate, Prudential would take certain actionsincluding selling investments, changing investment portfolio allocation, and adjusting bonuses credited topolicyholders. In addition, these analyzes do not consider the effect of market changes on new businessgenerated in the future.

Other limitations on the sensitivities include: the use of hypothetical market movements todemonstrate potential risk that only represent Prudential’s view of reasonably possible near-term marketchanges and that cannot be predicted with any certainty; the assumption that interest rates in allcountries move identically; the assumption that all global currencies move in tandem with the US dollaragainst pounds sterling; and the lack of consideration of the inter-relation of interest rates, equitymarkets and foreign currency exchange rates.

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

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Item 14. Material Modifications to the Rights of Security Holders

None.

Item 15. Controls and Procedures

Management has evaluated, with the participation of Prudential’s Group Chief Executive and GroupChief Financial Officer, the effectiveness of Prudential’s disclosure controls and procedures as atDecember 31, 2007. There are inherent limitations to the effectiveness of any system of disclosurecontrols and procedures, including the possibility of human error and the circumvention or overriding ofthe controls and procedures. Accordingly, even effective disclosure controls and procedures can onlyprovide reasonable assurance of achieving their control objectives. Based upon Prudential’s evaluation,the Group Chief Executive and Group Chief Financial Officer concluded that as of December 31, 2007Prudential’s disclosure controls and procedures were effective to provide reasonable assurance thatinformation required to be disclosed by Prudential in the reports Prudential files and submits under theSecurities Exchange Act is recorded, processed, summarized and reported, within the time periodsspecified in the applicable rules and forms and that it is accumulated and communicated to Prudential’smanagement, including the Group Chief Executive and Group Chief Financial Officer, as appropriate toallow timely decisions regarding required disclosure.

From December 31, 2006, the Group is required to undertake an annual assessment of theeffectiveness of internal controls over financial reporting under Section 404 of the Sarbanes-Oxley Act.In accordance with the requirements of Section 404 the following report is provided by management inrespect of the Group’s internal control over financial reporting (as defined in Rules 13a-15(f) and15-d-15(f) under the US Securities Exchange Act of 1934):

Management’s Annual Report on Internal Controls over Financial Reporting

Management acknowledges its responsibility for establishing and maintaining adequate internalcontrol over financial reporting for the Group. Internal control over financial reporting is designed toprovide reasonable assurance regarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with International Financial Reporting Standardsas issued by the International Accounting Standards Board.

Management has conducted, with the participation of Prudential’s Group Chief Executive and GroupChief Financial Officer, an evaluation of the effectiveness of internal control over financial reportingbased on the framework in ‘‘Internal Control—Integrated Framework’’ issued by the Committee ofSponsoring Organizations of the Treadway Commission (‘‘COSO’’). Based on the assessment under thesecriteria, Management has concluded that, as of December 31, 2007, the Group’s internal control overfinancial reporting was effective. In addition, there have been no changes in the Group’s internal controlover financial reporting during 2007 that have materially affected, or are reasonably likely to affectmaterially, the Group’s internal control over financial reporting.

KPMG Audit Plc, which has audited the consolidated financial statements of the Group for the yearended December 31, 2007, has also audited the effectiveness of the Group’s internal control overfinancial reporting under Auditing Standard No. 5 of the Public Company Accounting Oversight Board(United States). The audit report on internal control over financial reporting is shown below.

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Report of Independent Registered Public Accounting Firm to the Board of Directors andShareholders of Prudential plc

We have audited Prudential plc’s internal control over financial reporting as of December 31, 2007,based on criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (‘‘COSO’’). Prudential plc’s management isresponsible for maintaining effective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting, included in the accompanying Controls andProcedures. Our responsibility is to express an opinion on the Company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financialreporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audit also includedperforming such other procedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. A company’s internalcontrol over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generallyaccepted accounting principles, and that receipts and expenditures of the company are being made onlyin accordance with authorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

In our opinion, Prudential plc maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the TreadwayCommission.

We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of Prudential plc and subsidiaries as ofDecember 31, 2007 and 2006, and the related consolidated income statements, statements of changesin equity, and consolidated cash flow statements for each of the years in the three-year period endedDecember 31, 2007, and our report dated May 15, 2008 expressed an unqualified opinion on thoseconsolidated financial statements.

May 15, 2008 By: /s/ KPMG AUDIT PLC

KPMG Audit PlcLondon, England

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Item 16A. Audit Committee Financial Expert

The Board has determined that Kathleen O’Donovan, Chairman of the Audit Committee, qualifies asan audit committee financial expert within the meaning of Item 16A of Form 20-F, and thatMs O’Donovan is independent as defined by the New York Stock Exchange Corporate GovernanceStandards.

Item 16B. Code of Ethics

Prudential has a code of ethics, as defined in Item 16B of Form 20-F under the Exchange Act,(which Prudential calls its Code of Business Conduct) which applies to the Group Chief Executive, theChief Financial Officer and persons performing similar functions as well as to all other employees.Prudential’s Code of Business Conduct is available on its website at www.prudential.co.uk. If Prudentialamends the provisions of the Code of Business Conduct, as it applies to the Group Chief Executive,Group Chief Financial Officer and the Group Chief Risk Officer or if Prudential grants any waiver of suchprovisions, the Company will disclose such amendment or waiver on the Prudential website. There wereno amendments to, or waivers from, the Code of Business Conduct in 2006. On June 21, 2007, theCode of Business Conduct was revised to incorporate a clause on anti-money laundering and financialcrime. This is now available on Prudential’s website at www.prudential.co.uk.

Item 16C. Principal Accountant Fees and Services

The Group Audit Committee (the ‘‘Committee’’) has a key oversight role in relation to the externalauditor, KPMG Audit Plc, whose primary relationship is with the Committee. The Group’s AuditorIndependence Policy seeks to ensure that the independence and objectivity of the external auditor is notimpaired. The policy sets out four key principles which underpin the provision of non-audit services bythe external auditor, namely that the auditor should not:

• audit its own firm’s work;

• make management decisions for the Group;

• have a mutuality of financial interest with the Group; or

• be put in the role of advocate for the Group.

All services provided by the auditor in accordance with this policy are pre-approved by theCommittee. The Committee reviewed and updated the policy in 2007 to ensure alignment with the lateststandards and best practice in establishing, maintaining and monitoring auditor independence andobjectivity.

Audit fees

For the year ended December 31, 2007, the Committee approved fees of £9.1 million to its auditor,KPMG Audit Plc, for audit services and other services supplied pursuant to relevant legislation. Inaddition, the Committee approved fees of £2.3 million to KPMG for services not related to audit work,which accounted for 20 per cent of total fees paid to the external auditor during the year. Non-auditservices primarily related to actuarial and basic tax compliance work, and to the provision of attestationand comfort letters. In accordance with the Group’s Auditor Independence Policy, all services wereapproved prior to work commencing, and each of the non-audit services was confirmed to bepermissible for the external auditor to undertake, as defined by the Sarbanes-Oxley Act. The Committeereviewed the non-audit services being provided to the Group by KPMG at regular intervals during 2007.

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Total fees payable to KPMG for the fiscal years ended December 31, 2007 and 2006 are set outbelow:

Restated2007 2006

(in £ Millions)

Fees payable to Prudential’s auditor for the audit of Prudential’s annual accounts . . . . 1.8 2.3Fees payable to Prudential’s auditor and its associates for other services:Audit of subsidiaries and associates pursuant to legislation . . . . . . . . . . . . . . . . . . . 4.4 3.8Other services supplied pursuant to legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9 4.0Other services relating to taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.2Valuation and actuarial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.0Services relating to corporate finance transactions . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.7All other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 12.3

In addition, there were fees of £0.2 million (2006: £0.2 million) for the audit of pension schemes.

2007

Fees of £1.8 million for the audit of Prudential’s annual accounts comprised statutory audit fees of£0.9 million, US GAAP audit fees of £0.4 million and EEV reporting audit fees of £0.5 million. Fees of£4.4 million for audit of subsidiaries and associates pursuant to legislation mainly related to the audit oflocal and statutory accounts and to statutory audit work in connection with the submission of results tobe consolidated in Prudential’s annual accounts.

Fees of £2.9 million for other services supplied pursuant to legislation comprised of Sarbanes-Oxleyreporting of £1.4 million and interim and regulatory reporting of £1.5 million.

Fees of £0.4 million for services relating to taxation related to tax compliance throughout theGroup. Fees of £0.2 million for services relating to corporate finance transactions related to work inconnection with the sale of Egg Banking plc to Citi and to due diligence work.

Fees of £0.7 million for valuation and actuarial services related to work in connection with MCEVand with the investigation into possible re-attribution of the inherited estate.

Fees of £1.0 million for all other services comprised services in respect of accounting and regulatoryrequirements of £0.1 million services, in respect of attestation letters of £0.8 million, and services inrespect of Sarbanes-Oxley requirements of £0.1 million.

2006

Fees of £2.3 million for the audit of Prudential’s annual accounts comprised statutory audit fees of£0.9 million, US GAAP audit fees of £0.8 million and EEV reporting audit fees of £0.6 million. Fees of£3.8 million for audit of subsidiaries and associates pursuant to legislation mainly related to the audit oflocal and statutory accounts and to statutory audit work in connection with the submission of results tobe consolidated in Prudential’s annual accounts.

Fees of £4.0 million for other services supplied pursuant to legislation comprised of Sarbanes-Oxleyreporting of £2.6 million and interim and regulatory reporting of £1.4 million.

Fees of £0.2 million for services relating to taxation related to tax compliance throughout theGroup. Fees of £0.7 million for services relating to corporate finance transactions related to work inconnection with a business proposal received and to due diligence work.

209

Fees of £1.3 million for all other services comprised services in respect of accounting and regulatoryrequirements of £0.5 million, services in respect of attestation letters of £0.5 million, and services inrespect of Sarbanes-Oxley requirements of £0.3 million.

Auditor performance and independence

As part of its work during 2007 the Committee assessed the performance of the external auditor, itsindependence and objectivity, and the effectiveness of the audit process. In addition to questioning theexternal auditor and the Group Finance Director, which is a regular feature of meetings, the review ofthe effectiveness of the external audit process was conducted through a questionnaire-based exerciseadministered by Group-wide Internal Audit, supplemented by interviews with senior finance staff andCommittee members. In addition, the Committee reviewed the external audit strategy and receivedreports from the auditor on its own policies and procedures regarding independence and quality control,including an annual confirmation of its independence in line with industry standards.

Re-appointment of auditor

The Group operates a policy under which at least once every five years a formal review isundertaken by the Committee to assess whether the external audit should be re-tendered. The externalaudit was last put out to competitive tender in 1999 when the present auditor was appointed. In 2005,2006 and 2007 the Committee formally considered the need to re-tender the external audit service andconcluded that, given the significant changes in accounting, audit and regulatory requirements, theinterests of the Company were better served by retaining the existing auditor through a period ofcontinuing change. In addition, the Committee concluded that there was nothing in the performance ofthe auditor requiring a change. During the year, following the approval of the 2006 Annual Report, anew lead audit partner was appointed by KPMG Audit Plc, in line with the Auditing Practices BoardEthical Statements in the UK and the Sarbanes-Oxley Act in the US.

Following its review of the external auditor’s effectiveness and independence, the Committeerecommended to the Board that KPMG Audit Plc be re-appointed as auditor of the Company, and aresolution for the re-appointment of KPMG Audit Plc as auditor of the Company to hold office until theend of the 2009 Annual General Meeting was approved by shareholders at the Annual General Meetingon May 15, 2008.

210

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable

Item 16E. Purchases of Equity Securities by Prudential plc and Affiliated Purchasers.

The following table sets forth information with respect to purchases made by or on behalf ofPrudential or any ‘‘affiliated purchasers’’ (as that term is defined in Rule 10b-18(a)(3) under theSecurities Exchange Act of 1934, as amended) of Prudential’s ordinary shares or American depositaryshares for the year ended December 31, 2007.

Total Numberof Shares

Average Purchased as Maximum Number ofPrice Part of Publicly Shares that May

Total Number Paid Per Announced Yet be Purchasedof Shares Share Plans Under Plans

Period Purchased(1)(2) (£) or Programs or Programs

January 1 - January 31 . . . . . . . . . . . . 9,975 7.1288 N/A N/AFebruary 1 - February 28 . . . . . . . . . . 9,693 7.1867March 1 - March 31 . . . . . . . . . . . . . 17,410 6.7960April 1 - April 30 . . . . . . . . . . . . . . . 12,239 7.4979May 1 - May 31 . . . . . . . . . . . . . . . . 25,458 7.9797June 1 - June 30 . . . . . . . . . . . . . . . . 10,936 7.1741July 1 - July 31 . . . . . . . . . . . . . . . . . 11,021 7.3082August 1 - August 31 . . . . . . . . . . . . 598,924 7.1231September 1 - September 30 . . . . . . . . 10,435 7.0297October 1 - October 31 . . . . . . . . . . . 587,121 7.6843November 1 - November 30 . . . . . . . . 10,451 7.0527December 1 - December 31 . . . . . . . . 11,876 7.1419

(1) The shares listed in this column were acquired by employee benefit trusts during the year to satisfy future obligations todeliver shares under the Company’s employee incentive plans, the savings-related share option scheme and the shareparticipation plan.

(2) This table excludes Prudential plc shares purchased by investment funds managed by M&G in accordance with investmentstrategies that are established by M&G acting independently of Prudential plc.

(3) In addition, 34,245 shares were allotted to the employee benefit trusts in lieu of receiving cash dividends as part ofPrudential’s scrip dividend program in May and September 2007.

211

Item 18. Financial Statements

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . F-2Consolidated Income Statements for the years ended December 31, 2007, 2006 and 2005 . . . . . F-3Statements of Changes in Equity for the years ended December 31, 2007, 2006 and 2005 . . . . . F-4Consolidated Balance Sheets at December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . F-7Consolidated Cash Flow Statements for the years ended December 31, 2007, 2006 and 2005 . . . F-9Index to the Notes to the Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-10

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Prudential plc

We have audited the accompanying consolidated balance sheet of Prudential plc and subsidiaries(together ‘‘Company’’) as of December 31, 2007 and 2006 and the related consolidated incomestatement, statement of changes in equity and consolidated cash flow statement for the each of theyears in the three-year period ended December 31, 2007. These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on theseconsolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Prudential plc and subsidiaries as of December 31, 2007 and 2006,and the results of their operations and their cash flows for each of the years in the three-year periodended December 31, 2007, in conformity with International Financial Reporting Standards (‘‘IFRS’’) asissued by the International Accounting Standards Board (‘‘IASB’’).

We also have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of the Company’s internal control over financialreporting as of December 31, 2007, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission(‘‘COSO’’), and our report dated May 15, 2008 expressed an unqualified opinion on the effectiveoperation of, internal control over financial reporting.

May 15, 2008 By: /s/ KPMG AUDIT PLC

KPMG Audit PlcLondon, England

F-2

Prudential plc and SubsidiariesConsolidated Income Statements

Years ended December 31

2007 2006 2005

(In £ millionsExcept Per Share Amounts)

Gross premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,359 16,157 15,225Outward reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (171) (171) (197)

Earned premiums, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,188 15,986 15,028

Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,221 17,128 23,120Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,457 1,917 1,862

Total revenue, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,866 35,031 40,010

Benefits and claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,210) (25,981) (30,465)Outward reinsurers’ share of benefits and claims . . . . . . . . . . . . . . . . . . . . (20) (144) 368Movement in unallocated surplus of with-profits funds . . . . . . . . . . . . . . . . . (760) (2,296) (3,003)

Benefits and claims and movements in unallocated surplus of with-profits funds,net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,990) (28,421) (33,100)

Acquisition costs and other operating expenditure . . . . . . . . . . . . . . . . . . . (4,523) (4,212) (4,514)Finance costs: interest on core structural borrowings of shareholder-financed

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (168) (177) (175)Goodwill impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (120)

Total charges, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,681) (32,810) (37,909)

Profit before tax* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 2,221 2,101Tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . . . . . . (19) (849) (1,147)

Profit before tax attributable to shareholders . . . . . . . . . . . . . . . . . . . . . . . 1,166 1,372 954Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (401) (1,241) (1,389)Less: tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . . . 19 849 1,147Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . . . . . . . . . . (382) (392) (242)

Profit from continuing operations after tax . . . . . . . . . . . . . . . . . . . . . . . . 784 980 712Discontinued operations (net of tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 (105) 48

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 875 760

Attributable to:Equity holders of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,022 874 748Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 12

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 875 760

Earnings per shareBasic (based on 2,445m, 2,413m and 2,365m shares respectively):

Based on profit from continuing operations attributable to the equity holdersof the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.9p 40.5p 29.6p

Based on profit (loss) from discontinued operations attributable to the equityholders of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.9p (4.3)p 2.0p

41.8p 36.2p 31.6p

Diluted (based on 2,448m, 2,416m and 2,369m shares respectively):Based on profit from continuing operations attributable to the equity holders

of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31.9p 40.5p 29.6pBased on profit (loss) from discontinued operations attributable to the equity

holders of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8p (4.3)p 2.0p

41.7p 36.2p 31.6p

* Profit before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before taxattributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders’ profits.

The presentation of the 2006 and 2005 comparative results has been adjusted to reclassify Egg asdiscontinued operations.

The accompanying notes are an integral part of these financial statements

F-3

Prudential plc and Subsidiaries

Statement of Changes in Equity

Year ended December 31

2007

Available- for-sale

Share Share Retained Translation securities Hedging Shareholders’ Minority Totalcapital premium earnings reserve reserve reserve equity interests equity

(In £ Millions)ReservesProfit for the year . . . . . . . . . . . . . . 1,022 1,022 3 1,025Items recognized directly in equity:

Exchange translation movements . . . . 11 11 11Movement on cash flow hedges . . . . (3) (3) (3)Unrealized valuation movements on

Egg securities classified asavailable-for-sale . . . . . . . . . . . . (2) (2) (2)

Unrealized valuation movements on USlife operations securities classified asavailable-for-sale:Unrealized holding losses arising

during the year . . . . . . . . . . . (231) (231) (231)Less gains included in the income

statement . . . . . . . . . . . . . . . (13) (13) (13)

(244) (244) (244)Related change in amortization of

deferred income and acquisitioncosts . . . . . . . . . . . . . . . . . 88 88 88

Related tax . . . . . . . . . . . . . . . . 2 53 1 56 56

Total items of income and expenserecognized directly in equity . . . . . . 13 (105) (2) (94) (94)

Total income and expense for the year . . 1,022 13 (105) (2) 928 3 931Dividends . . . . . . . . . . . . . . . . . . (426) (426) (5) (431)Reserve movements in respect of share-

based payments . . . . . . . . . . . . . . 18 18 18Change in minority interests arising

principally from purchase and sale ofventure investment companies andproperty partnerships of the PACwith-profits fund and of otherinvestments . . . . . . . . . . . . . . . . (28) (28)

Share capital and share premiumNew share capital subscribed . . . . . . . 1 181 182 182Transfer to retained earnings in respect

of shares issued in lieu of cashdividends . . . . . . . . . . . . . . . . . (175) 175

Treasury sharesMovement in own shares in respect of

share-based payment plans . . . . . . . 7 7 7Movement in Prudential plc shares

purchased by unit trusts consolidatedunder IFRS . . . . . . . . . . . . . . . . 4 4 4

Net increase (decrease) in equity . . . . . 1 6 800 13 (105) (2) 713 (30) 683At beginning of year . . . . . . . . . . . . 122 1,822 3,640 (125) 27 2 5,488 132 5,620

At end of year . . . . . . . . . . . . . . . 123 1,828 4,440 (112) (78) — 6,201 102 6,303

The accompanying notes are an integral part of these financial statements

F-4

Prudential plc and Subsidiaries

Statement of Changes in Equity

Year ended December 31

2006

Available- for-sale

Share Share Retained Translation securities Hedging Shareholders’ Minority Totalcapital premium earnings reserve reserve reserve equity interests equity

(In £ Millions)ReservesProfit for the year . . . . . . . . . . . . . . 874 874 1 875Items recognized directly in equity:

Exchange movements . . . . . . . . . . (224) (224) (224)Movement on cash flow hedges . . . . 7 7 7Unrealized valuation movements on

Egg securities classified asavailable-for-sale . . . . . . . . . . . . (2) (2) (2)

Unrealized valuation movements on USlife operations securities classified asavailable-for-sale:Unrealized holding losses arising

during the year . . . . . . . . . . . (208) (208) (208)Less losses included in the income

statement . . . . . . . . . . . . . . . 7 7 7

(201) (201) (201)Related change in amortization of

deferred income and acquisitioncosts . . . . . . . . . . . . . . . . . 75 75 75

Related tax . . . . . . . . . . . . . . . . (74) 50 (2) (26) (26)

Total items of income and expenserecognized directly in equity . . . . . . (298) (78) 5 (371) (371)

Total income and expense for the year . . 874 (298) (78) 5 503 1 504Dividends . . . . . . . . . . . . . . . . . . (399) (399) (399)Reserve movements in respect of share-

based payments . . . . . . . . . . . . . . 15 15 15Change in minority interests arising

principally from purchase and sale ofventure investment companies andproperty partnerships of the PACwith-profits fund and of otherinvestments . . . . . . . . . . . . . . . . 43 43

Acquisition of Egg minority interests . . . (167) (167) (84) (251)Share capital and share premiumNew share capital subscribed . . . . . . . 3 333 336 336Transfer to retained earnings in respect

of shares issued in lieu of cashdividends . . . . . . . . . . . . . . . . . (75) 75

Treasury sharesMovement in own shares in respect of

share-based payment plans . . . . . . . 6 6 6Movement in Prudential plc shares

purchased by unit trusts consolidatedunder IFRS . . . . . . . . . . . . . . . . 0 0 0

Net increase (decrease) in equity . . . . . 3 258 404 (298) (78) 5 294 (40) 254At beginning of year . . . . . . . . . . . . 119 1,564 3,236 173 105 (3) 5,194 172 5,366

At end of year . . . . . . . . . . . . . . . 122 1,822 3,640 (125) 27 2 5,488 132 5,620

The accompanying notes are an integral part of these financial statements

F-5

Prudential plc and Subsidiaries

Statement of Changes in Equity

Year ended December 31

2005

Available-Share Share Retained Translation for-sale Hedging Shareholders’ Minority Totalcapital premium earnings reserve reserve reserve equity interests equity

(In £ Millions)ReservesProfit for the year . . . . . . . . . . . . . . 748 748 12 760Items recognized directly in equity:

Exchange movements . . . . . . . . . . 268 268 268Movement on cash flow hedges . . . . (4) (4) 1 (3)Unrealized valuation movements on

Egg securities classified asavailable-for-sale . . . . . . . . . . . . (1) (1) (1)

Unrealized valuation movements on USlife operations securities classified asavailable-for-sale:Unrealized holding losses arising

during the year . . . . . . . . . . . (772) (772) (772)Less losses included in the income

statement . . . . . . . . . . . . . . . 22 22 22

(750) (750) (750)Related change in amortization of

deferred income and acquisitioncosts . . . . . . . . . . . . . . . . . 307 307 307

Related tax . . . . . . . . . . . . . . . . 65 152 1 218 218

Total items of income and expenserecognized directly in equity . . . . . . 333 (292) (3) 38 1 39

Total income and expense for the year . . 748 333 (292) (3) 786 13 799Cumulative effect of changes in

accounting policies on adoption ofIAS 32, IAS 39 and IFRS 4, net ofapplicable taxes at January 1, 2005 . . 2 (173) 397 226 (3) 223

Dividends . . . . . . . . . . . . . . . . . . (380) (380) (380)Reserve movements in respect of share-

based payments . . . . . . . . . . . . . . 15 15 (1) 14Change in minority interests arising

principally from purchase and sale ofventure investment companies andproperty partnerships of the PACwith-profits fund . . . . . . . . . . . . . 26 26

Share capital and share premiumNew share capital subscribed . . . . . . . 0 55 55 55Transfer to retained earnings in respect

of shares issued in lieu of cashdividends . . . . . . . . . . . . . . . . . (51) 51

Treasury sharesMovement in own shares in respect of

share-based payment plans . . . . . . . 0 0 0Movement in Prudential plc shares

purchased by unit trusts consolidatedunder IFRS . . . . . . . . . . . . . . . . 3 3 3

Net increase (decrease) in equity . . . . . 6 264 333 105 (3) 705 35 740

At beginning of year . . . . . . . . . . . . 119 1,558 2,972 (160) 4,489 137 4,626

At end of year . . . . . . . . . . . . . . . 119 1,564 3,236 173 105 (3) 5,194 172 5,366

The accompanying notes are an integral part of these financial statements

F-6

Prudential plc and Subsidiaries

Consolidated Balance Sheets

December 31

Assets 2007 2006

(In £ Millions)

Intangible assets attributable to shareholders:Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,341 1,341Deferred acquisition costs and other intangible assets . . . . . . . . . . . . . . . . 2,836 2,497

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,177 3,838

Intangible assets attributable to PAC with-profits fund:In respect of acquired subsidiaries for venture fund and other investment

purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 830Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 31

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211 861

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,388 4,699

Other non-investment and non-cash assets:Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012 1,133Reinsurers’ share of insurance contract liabilities . . . . . . . . . . . . . . . . . . . . 783 945Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925 1,012Current tax recoverable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 404Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,023 1,900Other debtors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,297 1,052

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,325 6,446

Investments of long-term business, banking and other operations:Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,688 14,491Investments accounted for using the equity method . . . . . . . . . . . . . . . . . . 12 6Financial investments:

Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,924 13,754Equity securities and portfolio holdings in unit trusts . . . . . . . . . . . . . . . . 86,157 78,892Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,984 81,719Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,396 3,220Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,889 7,759

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204,050 199,841

Held for sale assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 463Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,951 5,071

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,744 216,520

The accompanying notes are an integral part of these financial statements

F-7

Prudential plc and Subsidiaries

Consolidated Balance Sheets

December 31

Equity and liabilities 2007 2006

(In £ Millions)

EquityShareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,201 5,488Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 132

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,303 5,620

LiabilitiesBanking customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5,554Policyholder liabilities and unallocated surplus of with-profits funds:

Insurance contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,636 123,213Investment contract liabilities with discretionary participation features . . . . . . 29,550 28,733Investment contract liabilities without discretionary participation features . . . . 14,032 13,042Unallocated surplus of with-profits funds . . . . . . . . . . . . . . . . . . . . . . . . . 14,351 13,599

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,569 178,587

Core structural borrowings of shareholder-financed operations:Subordinated debt (other than Egg) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,570 1,538Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 922 1,074

2,492 2,612Egg subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 451

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,492 3,063

Other borrowings:Operational borrowings attributable to shareholder-financed operations . . . . . 3,081 5,609Borrowings attributable to with-profits funds . . . . . . . . . . . . . . . . . . . . . . 987 1,776

Other non-insurance liabilities:Obligations under funding, securities lending and sale and repurchase

agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,081 4,232Net asset value attributable to unit holders of consolidated unit trusts and

similar funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,556 2,476Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,237 1,303Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,475 3,882Accruals and deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599 517Other creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020 1,398Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 464Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,871 1,652Held for sale liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 387

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,312 16,311

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213,441 210,900

Total equity and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219,744 216,520

The accompanying notes are an integral part of these financial statements

F-8

Prudential plc and Subsidiaries

Consolidated Cash Flow Statements

Years ended December 31

2007 2006 2005

(In £ Millions)Cash flows from operating activitiesProfit before tax from continuing operations . . . . . . . . . . . . . . . . . . . . . . . 1,185 2,221 2,101Profit (loss) before tax from discontinued operations (including profit on sale) . . 222 (150) 47

Total profit before tax* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,407 2,071 2,148Changes in operating assets and liabilities:

Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,730) (13,748) (21,462)Banking customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (276) (861)Other non-investment and non-cash assets . . . . . . . . . . . . . . . . . . . . . . (817) (232) (960)Policyholder liabilities (including unallocated surplus) . . . . . . . . . . . . . . . . 12,017 13,540 21,113Other liabilities (including operational borrowings) . . . . . . . . . . . . . . . . . . 962 1,136 180

Interest income and expense and dividend income included in profit before tax . (8,201) (10,056) (8,410)Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (140) 198 0Operating cash items:

Interest receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,541 6,466 5,946Dividend receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,732 3,633 2,680Tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (624) (523) (573)

Net cash flows from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . 1,138 2,209 (199)

Cash flows from investing activitiesPurchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . (231) (174) (160)Proceeds from disposal of property, plant and equipment . . . . . . . . . . . . . . . 61 34 6Costs incurred on purchase of Egg minority interests . . . . . . . . . . . . . . . . . . — (6) —Acquisition of subsidiaries, net of cash balances . . . . . . . . . . . . . . . . . . . . . (77) (70) (68)Disposal of Egg, net of cash balances . . . . . . . . . . . . . . . . . . . . . . . . . . . (538) — —Disposal of other subsidiaries, net of cash balances . . . . . . . . . . . . . . . . . . . 157 114 252Deconsolidation of investment subsidiaries** . . . . . . . . . . . . . . . . . . . . . . (91) — —

Net cash flows from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (719) (102) 30

Cash flows from financing activitiesStructural borrowings of the Group:

Shareholder-financed operations:Issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 168Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150) (1) (308)Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (171) (204) (204)

With-profits operations:Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (9) (9)

Equity capital:Issues of ordinary share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 15 3Dividends paid*** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (255) (323) (328)

Net cash flows from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . (579) (522) (678)

Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . (160) 1,585 (847)Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . 5,071 3,586 4,341Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . 40 (100) 92

Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . 4,951 5,071 3,586

* Profit before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before taxattributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders’ profits. Itdoes not represent profit before tax attributable to shareholders.

** In November 2007, Prudential sold its venture fund management subsidiary, PPM Capital, as described in note I6. As a resultof the arrangements attaching to the sale, it is no longer appropriate to consolidate the holdings managed by that company.

*** Dividends paid are net of scrip dividend as described in note B2.

The accompanying notes are an integral part of these financial statements

F-9

INDEX TO THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSPage

Section A: Background

A1 Nature of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-12

A2 Basis of preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-12

A3 Critical accounting policies, estimates and judgements . . . . . . . . . . . . . . . . . . . . . . . . . . F-13

A4 Significant accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-22

A5 New accounting pronouncements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-37

Section B: Summary of results

B1 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-40

B2 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-42

B3 Exchange translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-42

B4 Group balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-43

B5 Internal funds under management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-49

Section C: Group risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-49

Section D: Life assurance business

D1 Group overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-55

D2 UK insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-67

D3 US insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-85

D4 Asian insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-106

D5 Capital position statement for life assurance businesses . . . . . . . . . . . . . . . . . . . . . . . . . . F-116

Section E: Asset management (including US broker dealer) and other operations

E1 Income statement for asset management operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-127

E2 Balance sheet for asset management operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-128

E3 Regulatory capital positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-129

E4 Sensitivity of profit and equity to market and other financial risk . . . . . . . . . . . . . . . . . . . . F-129

E5 Other operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-130

Section F: Income statement notes

F1 Segmental information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-131

F2 Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-133

F3 Acquisition costs and other operating expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-134

F4 Finance costs: Interest on core structural borrowings of shareholder-financed operations . . . . . F-134

F5 Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-135

Section G: Financial assets and liabilities

G1 Financial instruments—designation and fair values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-142

G2 Market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-148

G3 Derivatives and hedging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-155

G4 Derecognition, securitization and collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-159

G5 Impairment of financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-160

F-10

Page

Section H: Other information on balance sheet items

H1 Intangible assets attributable to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-161

H2 Intangible assets attributable to the Prudential Assurance Company Limited (PAC) with-profitsfund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-165

H3 Reinsurers’ share of insurance contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-166

H4 Tax assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-167

H5 Accrued investment income and other debtors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-169

H6 Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-170

H7 Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-172

H8 Investments in associates and joint ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-174

H9 Assets and liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-177

H10 Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-178

H11 Shareholders’ equity: share capital, share premium and reserves . . . . . . . . . . . . . . . . . . . . F-178

H12 Insurance contract liabilities and unallocated surplus of with-profits funds . . . . . . . . . . . . . . F-180

H13 Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-181

H14 Provisions and contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-185

H15 Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-192

Section I: Other notes

I1 Staff and pension plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-192

I2 Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-208

I3 Key management remuneration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-214

I4 Fees payable to auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-215

I5 Related party transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-215

I6 Subsidiary undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-216

I7 Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-220

I8 Cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-220

Section J: Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-221

J1 Income statement for discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . F-222

J2 Balance sheet for discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-223

J3 Risk management overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-223

J4 Maturities of assets and liabilities and liquidity risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-224

J5 Losses on loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-224

J6 Market risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-225

J7 Credit risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-226

J8 Capital position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-228

F-11

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background

A1: Nature of operations

Prudential plc (the Company) together with its subsidiaries (collectively, the Group or Prudential) isan international financial services group with its principal operations in the UK, the US and Asia. TheGroup operates in the UK through its subsidiaries, primarily The Prudential Assurance Company Limited(PAC), Prudential Annuities Limited (PAL), Prudential Retirement Income Limited (PRIL), M&G InvestmentManagement Limited and, prior to disposal, Egg Banking plc. On January 29, 2007 the Companyannounced that it had entered into a binding agreement to sell its Egg banking business to Citi, asdescribed in note I6. On May 1, 2007, the Company completed the sale.

In the US, the Group’s principal subsidiary is Jackson National Life Insurance Company (Jackson).The Group also has operations in Hong Kong, Malaysia, Singapore, Taiwan and other Asian countries.

Prudential offers a wide range of retail financial products and services and asset managementservices throughout these territories. The retail financial products and services principally include lifeinsurance, pensions and annuities as well as collective investment services.

Long-term business products written in the UK and Asia are principally with-profits depositadministration, other conventional and unitized with-profits policies and non-participating pensionannuities in the course of payment. Long-term business also includes linked business written in the UKand Asia. The principal products written by Jackson are interest-sensitive deferred annuities andwhole-life policies, variable annuities, guaranteed investment contracts, fixed index deferred annuitiesand term life insurance.

Prudential plc is a public limited company incorporated and registered in England and Wales. Theregistered office is:

Laurence Pountney HillLondonEC4R 0HHUK Companies House registered number: 1397169

A2: Basis of preparation

The consolidated financial statements consolidate the Group and the Group’s interest in associatesand jointly-controlled entities. The parent company financial statements present information about theCompany as a separate entity and not about the Group.

The consolidated financial statements have been prepared and approved by the directors inaccordance with International Financial Reporting Standards (IFRS) as issued by the InternationalAccounting Standards Board (IASB). Were the Group to apply IFRS as adopted by the European Union(‘‘EU’’) as opposed to those issued by the IASB no additional adjustment would be required.

In 2007 the Group adopted IFRS 7, ‘Financial Instruments: Disclosures’, IAS 1 (as amended) andamendment to IFRS 4 Implementation Guidance.

The Group has applied all IFRS standards and interpretations issued by the IASB and effective atDecember 31, 2007.

F-12

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

The consolidated financial statements do not represent the Prudential’s statutory accounts for thepurposes of the UK Companies Act 1985. These financial statements are based on the prescribedformats. The Group’s external auditors have reported on the 2007, 2006 and 2005 statutory accountsand the accounts have been delivered to the UK Registrar of Companies. The auditors’ reports wereunqualified and did not contain a statement under Section 237 (2) (inadequate accounting records orreturns not agreeing with records and returns) or Section 237 (3) (failure to obtain necessary informationand explanations) of the UK Companies Act 1985.

The preparation of the consolidated financial statements requires management to make estimatesand assumptions that affect the amounts reported in the financial statements and the accompanyingnotes. Actual results could differ from those estimates.

The years ‘‘2007’’, ‘‘2006’’ and ‘‘2005’’ refer to the years ended December 31, 2007, 2006 and2005 respectively.

A3: Critical accounting policies, estimates and judgements

(a) Critical accounting policies

Prudential’s discussion and analysis of its financial condition and results of operations are basedupon Prudential’s consolidated financial statements, which have been prepared in accordance with IFRSas issued by the IASB.

The preparation of these financial statements requires Prudential to make estimates and judgementsthat affect the reported amounts of assets, liabilities, and revenues and expenses, and related disclosureof contingent assets and liabilities. On an ongoing basis, Prudential evaluates its estimates, includingthose related to long-term business provisioning, the fair value of assets and the declaration of bonusrates. Prudential bases its estimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which form the basis for makingjudgements about the carrying value of assets and liabilities that are not readily apparent from othersources. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies are defined as those that are reflective of significant judgements anduncertainties, and potentially give rise to different results under different assumptions and conditions.Prudential believes that its critical accounting policies are limited to those described below.

The critical accounting policies in respect of the items discussed below are critical for the Group’sresults insofar as they relate to the Group’s shareholder-financed business, in particular for Jackson. Thepolicies are not critical in respect of the Group’s with-profits business. Accordingly, explanation isprovided in this note and cross-referenced notes as to why the distinction between with-profits businessand shareholder-backed business is relevant.

The items discussed below and in cross-referenced notes explain the effect of changes in estimatesand the effect of reasonably likely changes in the key assumptions underlying these estimates as of thelatest balance sheet date so as to provide analysis that recognizes the different accounting effects onprofit and loss or equity. In order to provide relevant analysis that is appropriate to the circumstancesapplicable to the Group’s businesses, the explanations refer to types of business, fund structure, therelationship between asset and policyholder liability measurement, and the differences in the method of

F-13

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

accounting permitted under IFRS 4 for accounting for insurance contract assets, policyholder liabilitiesand unallocated surplus of the Group’s with-profits funds.

Insurance contract accounting

With the exception of certain contracts described in note D1, the Group’s life assurance contractsare classified as insurance contracts and investment contracts with discretionary participating features.As permitted by IFRS 4, assets and liabilities of these contracts (see below) are accounted for underpreviously applied GAAP. Accordingly, except as described below, the modified statutory basis (MSB) ofreporting as set out in the revised Statement of Recommended Practice (SORP) issued by theAssociation of British Insurers (ABI) in November 2003 has been applied.

In 2005 the Group chose to improve its IFRS accounting for UK regulated with-profits funds by thevoluntary application of the UK accounting standard FRS 27, ‘Life Assurance’. Under this standard, themain accounting changes that were required for UK with-profits funds were:

• Derecognition of deferred acquisition costs and related deferred tax; and

• replacement of MSB liabilities with adjusted realistic basis liabilities.

The results shown for 2007, 2006 and 2005 reflect this basis.

Unallocated surplus represents the excess of assets over policyholder liabilities for the Group’swith-profits funds that have yet to be appropriated between policyholders and shareholders. The Grouphas opted to account for unallocated surplus wholly as a liability with no allocation to equity. Thistreatment reflects the fact that shareholders’ participation in the cost of bonuses arises only ondistribution. Shareholder profits on with-profits business reflect one-ninth of the cost of declared bonus.

For Jackson, applying the MSB as applicable to overseas operations, the assets and liabilities ofinsurance contracts are accounted for under insurance accounting prescribed by US GAAP. For theassets and liabilities of insurance contracts of Asian operations, the local GAAP is applied withadjustments, where necessary, to comply with UK GAAP. For the operations in Taiwan, Vietnam andJapan, countries where local GAAP is not appropriate in the context of the previously applied MSB,accounting for insurance contracts is based on US GAAP. For participating business the liabilities includeprovisions for the policyholders’ interest in realized investment gains and other surpluses that, whereappropriate, and in particular for Vietnam, have yet to be declared as bonuses.

The usage of these bases of accounting has varying effects on the way in which product optionsand guarantees are measured. For UK regulated with-profits funds, for the 2007, 2006 and 2005 results,options and guarantees are valued on a market consistent basis. The basis is described in note D2(e)(ii).For other operations a market consistent basis is not applied under the accounting basis described innote A4. Details of the guarantees, basis of setting assumptions, and sensitivity to altered assumptionsare described in notes D3 and D4.

F-14

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Valuation and accounting presentation of fair value movements of derivatives and debtsecurities of Jackson

Under IAS 39, derivatives are required to be carried at fair value. Unless net investment hedgeaccounting is applied, value movements on derivatives are recognized in the income statement.

For derivative instruments of Jackson, the Group has considered at length whether it is appropriateto undertake the necessary operational changes to qualify for hedge accounting so as to achievematching of value movements in hedging instruments and hedged items in the performance statements.In reaching the decision a number of factors were particularly relevant. These were:

• IAS 39 hedging criteria have been designed primarily in the context of hedging and hedginginstruments that are assessable as financial instruments that are either stand-alone or separablefrom host contracts, rather than, for example, duration characteristics of insurance contracts;

• the high hurdle levels under IAS 39 of ensuring hedge effectiveness at the level of individualhedge transactions;

• the difficulties in applying the macro hedge provisions under IAS 39 (which are more suited tobanking arrangements) to Jackson’s derivative book;

• the complexity of asset and liability matching of US life insurers such as those with Jackson’sproduct range; and finally

• whether it is possible or desirable, without an unacceptable level of costs and constraint oncommercial activity, to achieve the accounting hedge effectiveness required under IAS 39.

In this regard, the issues surrounding IAS 39 application are very similar to those considered byother US life insurers when the US financial reporting standard FAS 133 was first applied for US GAAPreporting. Taking account of these considerations the Group has decided that, except for certain minorcategories of derivatives, it is not appropriate to seek to achieve hedge accounting under IAS 39. As aresult of this decision the total income statement results are more volatile as the movements in the valueof Jackson’s derivatives are reflected within it.

Under IAS 39, unless carried at amortized cost (subject to impairment provisions where appropriate)under the held-to-maturity category, debt securities are also carried at fair value. The Group has chosennot to classify any financial assets as held-to-maturity. Debt securities of Jackson are designated asavailable-for-sale with value movements being recorded as movements within shareholders’ equity.

Presentation of results before tax

The total tax charge for the Group reflects tax that in addition to relating to shareholders’ profits isalso attributable to policyholders and unallocated surplus of with-profits funds and unit-linked policies.This is explained in more detail in note F5. However, pre-tax profits are determined after transfers to orfrom unallocated surplus of with-profits funds. These transfers are in turn determined after takingaccount of tax borne by with-profits funds. Consequently reported profit before the total tax charge isnot representative of pre-tax profits attributable to shareholders. In order to provide a measure ofpre-tax profits attributable to shareholders the Group has chosen to adopt an income statement

F-15

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

presentation of the tax charge and pre-tax results that distinguishes between policyholder andshareholder components.

(b) Critical accounting estimates and judgements

Investments

Determining the fair value of unquoted investments

The Group holds certain financial investments which are not quoted on active markets. Their fairvalues are determined in full or in part by using valuation techniques. If the market for a financialinvestment of the Group is not active, the Group establishes fair value by using quotations fromindependent third parties, such as brokers or by using valuation techniques. The fair values ofinvestments valued using a valuation technique at December 31, 2007 was £9,854 million (2006:£8,211 million). Of this amount £5,739 million (2006: £4,503 million) is held by with-profits operations,for which value movements do not affect directly shareholder results, and £4,115 million (2006:£3,708 million) is held by shareholder-backed operations. The valuation techniques include the use ofrecent arm’s length transactions, reference to other instruments that are substantially the same,discounted cash flow analysis, option adjusted spread models and, if applicable, enterprise valuation andmay include a number of assumptions relating to variables such as credit risk and interest rates. Changesin assumptions relating to these variables could positively or negatively impact the reported fair value ofthese instruments. Additional details are explained in note G1.

Determining impairments relating to financial assets

Available-for-sale securities

Financial investments carried on an available-for-sale basis are represented by Jackson’s and, prior tothe sale of Egg in May 2007, Egg’s debt securities portfolio. These are considered to be impaired ifthere has been a significant or prolonged period of decline in fair value below amortized cost or if thereis any other objective evidence of impairment. The consideration of this requires management’sjudgement. Among the factors considered is whether the decline in fair value results from a change inquality of the security itself, or from a downward movement in the market as a whole and the likelihoodof recovering the carrying value based on the current and short-term prospects of the issuer.

Unrealized losses that are considered to be primarily the result of market conditions, such asincreasing interest rates, unusual market volatility, or industry-related events, and where the Group alsobelieves there is a reasonable expectation for recovery and, furthermore, it has the intent and ability tohold the investment until maturity or the market recovers, are usually determined to be temporary.Prudential’s review of fair value involves several criteria, including economic conditions, credit lossexperience, other issuer-specific developments and future cash flows. These assessments are based onthe best available information at the time. Factors such as market liquidity, the widening of bid/askspreads and a change in cash flow assumptions can contribute to future price volatility. If actualexperience differs negatively from the assumptions and other considerations used in the consolidatedfinancial statements, unrealized losses currently in equity may be recognized in the income statement infuture periods. Additional details are described in note G5.

F-16

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Assets held at amortized cost

Financial assets classified as loans and receivables under IAS 39 are carried at amortized cost usingthe effective interest rate method. The loans and receivables include loans collateralized by mortgages,deposits and loans to policyholders. In estimating future cash flows, the Group looks at the expectedcash flows of the assets and applies historical loss experience of assets with similar credit risks that hasbeen adjusted for conditions in the historical loss experience which no longer exist or for conditions thatare expected to arise. The estimated future cash flows are discounted using the financial asset’s originalor variable effective interest rate and exclude credit losses that have not yet been incurred.

The risks inherent in reviewing the impairment of any investment include the risk that marketresults may differ from expectations; facts and circumstances may change in the future and differ fromestimates and assumptions; or the Group may later decide to sell the asset as a result of changedcircumstances.

The principal holdings of loans and receivables where credit risk was of particular significance wereloans and advances to customers held by Egg. Egg was sold in May 2007. Egg had significantconcentrations of credit risk in respect of its unsecured lending on credit cards, personal loans andmortgage lending secured on property in the UK. The table in note J5 details the movements in theallowance for losses on such loans and advances up to the date of sale.

Changes in the estimates of credit risk in any reporting period could result in a change in theallowance for losses on the loans and advances.

Insurance contracts

Product classification

IFRS 4 requires contracts written by insurers to be classified as either ‘insurance contracts’ or‘investment contracts’ depending on the level of insurance risk transferred. If significant insurance risk istransferred by the contract then it is classified as an insurance contract. Contracts that transfer financialrisk but not significant insurance risk are termed investment contracts. Furthermore, some contracts,both insurance and investment, contain discretionary participating features representing the contractualright to receive additional benefits as a supplement to guaranteed benefits:

(a) that are likely to be a significant portion of the total contract benefits;

(b) whose amount or timing is contractually at the discretion of the insurer; and

(c) that are contractually based on asset or fund performance, as discussed in IFRS 4.

Accordingly, insurers must perform a product classification exercise across their portfolio ofcontracts issued to determine the allocation to these various categories. IFRS 4 permits the continuedusage of previously applied GAAP for insurance contracts and investment contracts with discretionaryparticipating features. Except for UK regulated with-profits funds, as described subsequently, this basishas been applied by the Group.

F-17

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

For investment contracts that do not contain discretionary participating features, IAS 39 and, wherethe contract includes an investment management element, IAS 18, apply measurement principles toassets and liabilities attaching to the contract.

Valuation assumptions

(i) Contracts of with-profits funds

The Group’s insurance contracts and investment contracts with discretionary participating featuresare primarily with-profits and other protection type policies. For UK regulated with-profits funds, thecontract liabilities are valued by reference to the UK Financial Services Authority’s (FSA) realistic basis.In aggregate, this basis has the effect of placing a value on the liabilities of UK with-profits contracts,which reflects the amounts expected to be paid based on the current value of investments held by thewith-profits funds and current circumstances.

The basis of determining liabilities for the Group’s with-profits business has little or no effect on theresults attributable to shareholders. This is because movements on liabilities of the with-profits funds areabsorbed by the unallocated surplus. Except through indirect effects, or in remote circumstances asdescribed below, changes to liability assumptions are therefore reflected in the carrying value of theunallocated surplus, which is accounted for as a liability rather than shareholders’ equity.

A detailed explanation of the basis of liability measurement is contained in note D2(e)(ii).

The Group’s other with-profits contracts are written in with-profits funds that operate in some ofthe Group’s Asian operations. The liabilities for these contracts and those of Prudential AnnuitiesLimited, which is a subsidiary company of the PAC with-profits funds, are determined differently. Forthese contracts the liabilities are estimated using actuarial methods based on assumptions relating topremiums, interest rates, investment returns, expenses, mortality and surrenders. The assumptions towhich the estimation of these reserves is particularly sensitive are the interest rate used to discount theprovision and the assumed future mortality experience of policyholders.

For liabilities determined using the basis described above for UK regulated with-profits funds, andthe other liabilities described in the preceding paragraph, changes in estimates arising from the likelyrange of possible changes in underlying key assumptions have no direct impact on the reported profit.

This lack of sensitivity reflects the with-profits fund structure, basis of distribution, and theapplication of previous GAAP to the unallocated surplus of with-profits funds as permitted by IFRS 4.Changes in liabilities of these contracts that are caused by altered estimates are absorbed by theunallocated surplus of the with-profits funds with no direct effect on shareholders’ equity. TheCompany’s obligations and more detail on such circumstances are described in note H14.

(ii) Other contracts

Contracts, other than those of with-profits funds, are written in shareholder-backed operations ofthe Group. The significant shareholder-backed product groupings and the factors that may significantlyaffect IFRS results due to experience against assumptions or changes of assumptions vary significantlybetween business units. For some types of business the effect of changes in assumptions may besignificant, whilst for others, due to the nature of the product, assumption setting may be of less

F-18

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

significance. The nature of the products and the significance of assumptions are discussed in notes D2,D3 and D4. From the perspective of shareholder results the key sensitivity relates to assumed futureinvestment returns for the Taiwan life operation as described below.

Jackson

Jackson offers individual fixed annuities, fixed index annuities, immediate annuities, variableannuities, individual and variable life insurance and institutional products. With the exception ofinstitutional products and an incidental amount of business for annuity certain contracts, which areaccounted for as investment contracts under IAS 39, all of Jackson life assurance contracts areaccounted for under IFRS 4 as insurance contracts by applying US GAAP, the previous GAAP usedbefore IFRS adoption. Under US GAAP the requirements of SFAS 60 ‘Accounting and Reporting forInsurance Enterprises’ and SFAS 97 ‘Accounting and Reporting by Insurance Enterprises for certainLong-Duration Contracts and for Realized Gains and Losses from the Sale of Investments’ apply to thesecontracts. The accounting requirements under these standards and the effect of changes in valuationassumptions are considered below for fixed annuity, variable annuity and traditional life insurancecontracts.

Fixed annuity contracts, which are investment contracts under US GAAP terminology, are accountedfor by applying in the first instance a retrospective deposit method to determine the liability forpolicyholder benefits. This is then augmented by potentially three additional amounts, namely deferredincome, any amounts previously assessed against policyholders that are refundable on termination of thecontract, and any premium deficiency, i.e., any probable future loss on the contract. These types ofcontract contain considerable interest rate guarantee features. Notwithstanding the accompanying marketrisk exposure, except in the circumstances of interest rate scenarios where the guarantee rates includedin contract terms are higher than crediting rates that can be supported from assets held to coverliabilities, the accounting measurement of Jackson’s fixed annuity products is not generally sensitive tointerest rate risk. This position derives from the nature of the products and the US GAAP basis ofmeasurement.

Variable annuity contracts written by Jackson may provide for guaranteed minimum death, income,or withdrawal benefit features. In general terms, liabilities for these benefits are accounted for underUS GAAP by using estimates of future benefits and fees under best estimate assumptions. For variableannuity business the key assumption is the expected long-term level of equity market returns, which for2007, 2006 and 2005 was 8.4 per cent per annum determined using a mean reversion methodology.Likely changes to this percentage return are not expected to be significant.

These returns affect the level of future expected profits through their effects on the fee incomewith consequential impact on the amortization of deferred acquisition costs as described below and therequired level of provision for guaranteed minimum death benefit claims.

For traditional life insurance contracts, provisions for future policy benefits are determined underSFAS 60 using the net level premium method and assumptions as of the issue date as to mortality,interest, policy lapses and expenses plus provisions for adverse deviation.

F-19

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Except to the extent of mortality experience, which primarily affects profits through variations inclaim payments and the guaranteed minimum death benefit reserves, the profits of Jackson are relativelyinsensitive to changes in insurance risk.

Asian operations

The insurance products written in the Group’s Asian operations principally cover with-profitsbusiness, unit-linked business, and other non-participating business. The results of with-profits businessare relatively insensitive to changes in estimates and assumptions that affect the measurement ofpolicyholder liabilities. As for the UK business, this feature arises because unallocated surplus isaccounted for by the Group as a liability. The results of Asian unit-linked business are also relativelyinsensitive to changes in estimates or assumptions.

The principal non-participating business in the Group’s Asian operations, for which changes inestimates and assumptions are important from year to year, is the traditional whole-life business writtenin Taiwan. The premiums for the in-force business for these contracts have been set by the regulator atdifferent points for the industry as a whole. Premium rates were set to give a guaranteed minimum sumassured on death and a guaranteed surrender value on early surrender based on prevailing interest ratesat the time of policy issue. Premium rates also included an allowance for mortality and expenses. Therequired rates of guarantee have fallen over time as interest rates have reduced from a high of eight percent to current levels of around two per cent. The current low bond rates in Taiwan gives rise to anegative spread against the majority of these policies. The current cash costs of funding in forcenegative spread in Taiwan is around £45 million a year.

The profits attaching to these contracts are particularly affected by the rates of return earned, andestimated to be earned on, the assets held to cover liabilities and on future investment income andcontract cash flows. Under IFRS, the insurance contract liabilities of the Taiwan business are determinedon the US GAAP basis as applied previously under UK GAAP. Under this basis the policy liabilities arecalculated on sets of assumptions, which are locked-in at the point of policy inception, and a deferredacquisition cost asset is held in the balance sheet.

The adequacy of the insurance contract liabilities is tested by reference to best estimates ofexpected investment returns on policy cash flows and reinvested income. The assumed earned rates areused to discount the future cash flows. The assumed earned rates consist of a long-term best estimatedetermined by consideration of long-term market conditions, and rates assumed to be earned in thetrending period. At December 31, 2007 and 2006 it has been assumed that the longer-term bond ratewill be attained by December 31, 2013.

The liability adequacy test results are sensitive to the attainment of the trended rates during thetrending period and the level of the projected long-term rate.

Details of this sensitivity are shown in note D4(g)(iii).

Deferred acquisition costs

Significant costs are incurred in connection with acquiring new insurance business. Except foracquisition costs of with-profits contracts of the UK regulated with-profits funds, which are accounted

F-20

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

for under the realistic FSA regime as described in note A4, these costs, which vary with, and areprimarily related to, the production of new business, are capitalized and amortized against margins infuture revenues on the related insurance policies. The recoverability of the asset is measured and theasset is deemed impaired if the projected future margins are less than the carrying value of the asset. Tothe extent that the future margins differ from those anticipated, then an adjustment to the carryingvalue of the deferred acquisition cost asset will be necessary.

The deferral and amortization of acquisition costs is of most relevance to the Group’s results forshareholder-financed long-term business of Jackson and Asian operations. The majority of the UKshareholder-backed operations is for individual and group annuity business where the incidence ofacquisition costs is negligible.

Jackson

For term business, acquisition costs are deferred and amortized in line with expected premiums. Forannuity business, acquisition costs are deferred and amortized in line with expected gross profits on therelevant contracts. For interest-sensitive business, the key assumption is the long-term spread betweenthe earned rate and the rate credited to policyholders, which is based on the annual spread analysis. Inaddition, expected gross profits depend on mortality assumptions, assumed unit costs and terminationsother than deaths (including the related charges), all of which are based on a combination of actualexperience of the Jackson companies, industry experience and future expectations. A detailed analysis ofactual experience is measured by internally developed mortality studies.

For variable annuity business, the key assumption is the expected long-term level of equity marketreturns as described above.

Asian operations

The key shareholder-backed Asian operation is the Taiwan life business.

The sensitivity of the results for this operation, including the potential effect on write-offs ofdeferred acquisition costs, is significant and is described above.

Pensions

The Group applies the requirements of IAS 19, ‘Employee benefits’, to its defined benefit pensionschemes. Due to the inclusion of actuarial gains and losses in the income statement rather than beingrecognized directly in equity, the results of the Group are affected by changes in interest rates forcorporate bonds that affect the rate applied to discount projected pension payments and changes inmortality assumptions.

The economic participation in the surplus or deficits attaching to the main Prudential Staff PensionScheme (PSPS) and the smaller Scottish Amicable Pensions Scheme (SAPS) are shared between the PACwith-profits sub-fund (WPSF) and shareholder operations. The economic interest reflects the source ofcontributions over the scheme life, which in turn reflects the activity of the members during theiremployment.

F-21

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

In the case of PSPS, movements in the apportionment of the surplus or deficit for PSPS betweenthe WPSF and shareholders’ funds in 2007 reflect the 70⁄30 ratio applied to the base deficit position as atDecember 31, 2005 but with service cost and contributions for ongoing service apportioned byreference to the cost allocation for activity of current employees.

For SAPS the ratio is estimated to be 50/50 between the WPSF and shareholders’ funds.

Deferred tax

Deferred tax assets are recognized to the extent that they are regarded as recoverable, that is tothe extent that, on the basis of all the available evidence, it can be regarded as more likely than not thatthere will be suitable taxable profits against which the losses can be relieved. The UK taxation regimeapplies separate rules to trading and capital profits and losses. The distinction between temporarydifferences that arise from items of either a capital or trading nature may affect the recognition ofdeferred tax assets. The judgements made, and uncertainties considered, in arriving at deferred taxbalances in the financial statements are discussed in note H4.

Goodwill

Goodwill impairment testing requires the exercise of judgement by management as to prospectivefuture cash flows.

A4: Significant accounting policies

(a) Financial instruments (other than long-term business contracts classified as financialinstruments under IFRS 4)

Investment classification

Upon initial recognition, financial investments are measured at fair value. Subsequently, the Group ispermitted under IAS 39, subject to specific criteria, to designate its investments as either financialinvestments at fair value through profit and loss, financial investments held on an available-for-sale basis,financial investments held-to-maturity or loans and receivables. The Group holds financial investments onthe following bases:

(i) Financial assets and liabilities at fair value through profit and loss—this comprises assets andliabilities designated by management as fair value through profit and loss on inception. Theseinvestments are measured at fair value with all changes thereon being recognized in investmentincome.

(ii) Financial investments on an available-for-sale basis—this comprises assets that are designatedby management and/or do not fall into any of the other categories. These investments arecarried at fair value. Interest income is recognized on an effective interest basis in the incomestatement. Except for foreign exchange gains and losses on debt securities, not in functionalcurrency, which are included in the income statement, unrealized gains and losses arerecognized in equity. Upon disposal or impairment, accumulated unrealized gains and losses aretransferred from equity to the income statement as realized gains or losses.

F-22

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

(iii) Loans and receivables—this comprises investments that have fixed or determinable paymentsand are not designated as fair value through profit and loss or available-for-sale. Theseinvestments include loans collateralized by mortgages, deposits, loans to policyholders andother unsecured loans and receivables. These investments are carried at amortized cost usingthe effective interest method.

The Group has designated certain financial assets as fair value through profit and loss as theseassets are managed and their performance is evaluated on a fair value basis. These assets represent allof the Group’s financial assets except all loans and receivables and debt securities held by Jackson and,prior to its sale in May 2007, Egg. Debt securities held by Jackson and Egg (prior to its sale) areaccounted for on an available-for-sale basis. The use of the fair value option is consistent with theGroup’s risk management and investment strategies.

The Group uses the trade date method to account for regular purchases and sales of financial assetswith the exception of Egg’s loans and advances to customers which were on a settlement day basis.

Use of fair values

The Group uses current bid prices to value its quoted investments. Actively traded investmentswithout quoted prices are valued using external broker bid prices. If there is no active establishedmarket for an investment, the Group applies an appropriate valuation technique such as a discountedcash flow technique.

Impairments

The Group assesses at each balance sheet date whether there is objective evidence that a financialasset or group of financial assets not held at fair value through profit and loss is impaired. A financialasset or group of financial assets is impaired and impairment losses are incurred only if there is objectiveevidence of impairment as a result of one or more events that have occurred after the initial recognitionof the asset (a loss event) and that a loss event (or events) has an impact on the estimated future cashflows of the financial asset or group of financial assets that can be reliably estimated. Objective evidencethat a financial asset or group of financial assets is impaired includes observable data that comes to theattention of the Group. For assets designated as available-for-sale, the impairment is measured as thedifference between the amortized cost of the asset and its fair value which is removed from theavailable-for-sale reserve within equity and recognized in the income statement.

For loans and receivables carried at amortized cost, the impairment amount is the differencebetween amortized cost and the present value of the expected cash flows discounted at the originaleffective interest rate.

If, in subsequent periods, an impaired debt security held on an available-for-sale basis or animpaired loan or receivable recovers in value (in part or in full), and this recovery can be objectivelyrelated to an event occurring after the impairment, then the previously recognized impairment loss isreversed through the income statement (in part or in full).

F-23

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Derivatives and hedge accounting

Derivative financial instruments are used to reduce or manage investment, interest rate andcurrency exposures, to facilitate efficient portfolio management and for investment purposes. TheGroup’s policy is that amounts at risk through derivative transactions are covered by cash or bycorresponding assets.

The Group may designate certain derivatives as hedges. This includes fair value hedges, cash flowhedges and hedges of net investments in foreign operations. If the criteria for hedge accounting are metthen the following accounting treatments are applied from the date at which the designation is madeand the accompanying requisite documentation is in place:

(i) Hedges of net investments in foreign operations—the effective portion of any change in fairvalue of derivatives or other financial instruments designated as net investment hedges arerecognized in equity. The ineffective portion of changes in the fair value of the hedginginstrument is recorded in the income statement. The gain or loss on the hedging instrumentrecognized directly in equity is recognized in the income statement on disposal of the foreignoperation.

(ii) Fair value hedges—movements in the fair value of the hedged item attributable to the hedgedrisk are recognized in the income statement.

(iii) Cash flow hedges—the effective portion of changes in the fair value of derivatives designatedas cash flow hedges is recognized in equity. Movements in fair value relating to the ineffectiveportion are booked in the income statement. Amounts recognized directly in equity arerecorded in the income statement in the periods in which the hedged item affects profit orloss.

All derivatives that do not meet the relevant hedging criteria are carried at fair value withmovements in fair value being recorded in the income statement.

The primary areas of the Group’s continuing operations where derivative instruments are held arethe UK with-profits funds and annuity business, and Jackson. In addition, for 2005, 2006 and during2007 to the date of disposal, the Group also entered into significant derivative transactions for itsdiscontinued banking operations.

For the Group’s continuing operations, hedge accounting under IAS 39 is not usually applied. Theexceptions, where hedge accounting has been applied are summarized in note G3.

For UK with-profits funds the derivative programme is undertaken as part of the efficientmanagement of the portfolio as a whole. As noted in section D2 value movements on the with-profitsfunds investments are reflected in changes in asset-share liabilities to policyholders or the liability forunallocated surplus. Shareholders’ profit or equity is not affected directly by value movements on thederivatives held.

For UK annuity business the derivatives are held as part of the overall matching of asset returns andduration to match, as far as practical, with liabilities to policyholders. The carrying value of theseliabilities is sensitive to the return on the matching financial assets including derivatives held. Except for

F-24

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

the extent of minor mismatching, value movements on derivatives held for this purpose do not affectshareholders’ profit or equity.

For Jackson an extensive derivative programme is maintained. Value movements on the derivativesheld can be very significant in their effect on shareholder results. The Group has chosen generally notto seek to construct the Jackson derivative programme so as to facilitate hedge accounting wheretheoretically possible, under IAS 39. Further details on this aspect of the Group’s financial reporting aredescribed in note A3.

Embedded derivatives

Embedded derivatives are held by various Group companies including Jackson and, prior to the saleof Egg in the first half of 2007, Egg. They are embedded within other non-derivative host financialinstruments to create hybrid instruments. Where economic characteristics and risks of the embeddedderivatives are not closely related to the economic characteristics and risks of the host instrument, andwhere the hybrid instrument is not measured at fair value with the changes in fair value recognized inthe income statement, the embedded derivative is bifurcated and carried at fair value as a derivative inaccordance with IAS 39.

Securities lending including repurchase agreements

The Group is party to various securities lending agreements under which securities are loaned tothird parties on a short-term basis. The loaned securities are not derecognized; rather, they continue tobe recognized within the appropriate investment classification. The Group’s policy is that collateral inexcess of 100 per cent of the fair value of securities loaned is required from all securities borrowers andtypically consists of cash, debt securities, equity securities or letters of credit.

In cases where the Group takes possession of the collateral under its securities lending programme,the collateral, and corresponding obligation to return such collateral, are recognized in the consolidatedbalance sheet. To further minimize credit risk, the financial condition of counterparties is monitored on aregular basis.

Derecognition of financial assets and liabilities

The Group’s policy is to derecognize financial assets when it is deemed that substantially all therisks and rewards of ownership have been transferred. The Group also derecognizes a financial assetwhen the contractual rights to the cash flows from the financial asset expire. Where the Group neithertransfers nor retains substantially all the risks and rewards of ownership, the Group will derecognize thefinancial asset where it is deemed that the Group has not retained control of the financial asset.

F-25

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Where the transfer does not result in the Group transferring the right to receive the cash flows ofthe financial assets, but does result in the Group assuming a corresponding obligation to pay the cashflows to another recipient, the financial assets are also accordingly derecognized providing all of thefollowing conditions are met:

• The Group has no obligation to pay amounts to the eventual recipients unless it collects theequivalent amounts from the original asset;

• the Group is prohibited by the terms of the transfer contract from selling or pledging the originalasset; and

• the Group has an obligation to remit any cash flows it collects on behalf of the eventualrecipients without material delay.

The Group derecognizes financial liabilities only when the obligation specified in the contract isdischarged, cancelled or has expired.

Borrowings

Although initially recognized at fair value, net of transaction costs, borrowings, excluding liabilitiesof consolidated collateralized debt obligations, are subsequently accounted for on an amortized costbasis using the effective interest method. Under the effective interest method, the difference betweenthe redemption value of the borrowing and the initial proceeds (net of related issue costs) is amortizedthrough the income statement to the date of maturity.

Financial liabilities designated at fair value through profit and loss

Consistent with the Group’s risk management and investment strategy and the nature of theproducts concerned, the Group has designated under IAS 39 classification certain financial liabilities atfair value through profit and loss as these instruments are managed and their performance evaluated ona fair value basis. These instruments include liabilities related to consolidated collateralized debtobligations and net assets attributable to unit holders of consolidated unit trusts and similar funds.

(b) Long-term business contracts

Income statement treatment

Premiums and claims

Premium and annuity considerations for conventional with-profits policies and other protection typeinsurance policies are recognized when due. Premiums and annuity considerations for linked policies,unitized with-profits and other investment type policies are recognized when received or, in the case ofunitized or unit-linked policies, when units are issued. These amounts exclude any taxes or dutiesassessed based on premiums.

Policy fees charged on linked and unitized with-profits policies for mortality, asset management andpolicy administration are recognized as revenue when related services are provided.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Claims paid include maturities, annuities, surrenders and deaths. Maturity claims are recorded onthe policy maturity date. Annuity claims are recorded when the annuity becomes due for payment.Surrenders are recorded when paid and death claims are recorded when notified.

For investment contracts which do not contain discretionary participating features, the accountingreflects the deposit nature of the arrangement, with premiums and claims reflected as deposits andwithdrawals and taken directly to the balance sheet.

Acquisition costs

Costs of acquiring new insurance business, principally commissions, marketing and advertising costsand certain other costs associated with policy issuance and underwriting that are not reimbursed bypolicy charges, are specifically identified and capitalized as part of deferred acquisition costs (DAC),which are included as an asset in the balance sheet. The DAC asset in respect of insurance contracts isamortized against margins in future revenues on the related insurance policies, to the extent that theamounts are recoverable out of the margins. Recoverability of the unamortized DAC asset is assessed atthe time of policy issue and reviewed if profit margins have declined.

Under IFRS, investment contracts (excluding those with discretionary participation features) arerequired to be accounted for as financial liabilities in accordance with IAS 39 and, where relevant, theprovisions of IAS 18 in respect of the attaching investment management features of the contracts. TheGroup’s investment contracts primarily comprise certain unit-linked savings contracts in the UK and Asiaand contracts with fixed and guaranteed terms in the US (such as guaranteed investment contracts andannuity-certains).

Incremental, directly attributable acquisition costs relating to the investment management element ofthese contracts are capitalized and amortized in line with the related revenue. If the contracts involveup-front charges, this income is also deferred and amortized through the income statement in line withcontractual service provision.

UK regulated with-profits funds

Prudential’s long-term business written in the UK comprises predominantly life insurance policiesunder which the policyholders are entitled to participate in the returns of the funds supporting thesepolicies. Business similar to this type is also written in certain of the Group’s Asian operations subject tolocal market and regulatory conditions. Such policies are called with-profits policies. Prudential maintainswith-profits funds within the Group’s long-term business funds, which segregate the assets and liabilitiesand accumulate the returns related to that with-profits business. The amounts accumulated in thesewith-profits funds are available to provide for future policyholder benefit provisions and for bonuses tobe distributed to with-profits policyholders. The bonuses, both annual and final, reflect the right of thewith-profits policyholders to participate in the financial performance of the with-profits funds.Shareholders’ profits with respect to bonuses declared on with-profits business correspond to theshareholders’ share of the cost of bonuses as declared by the Board of directors. The shareholders’share currently represents one-ninth of the cost of bonuses declared for with-profits policies.

Annual bonuses are declared and credited each year to with-profits policies. The annual bonusesincrease policy benefits and, once credited, become guaranteed. Annual bonuses are charged to the

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

profit and loss account in the year declared. Final bonuses are declared each year and accrued for allpolicies scheduled to mature and for death benefits expected to be paid during the next financial year.Final bonuses are not guaranteed and are only paid on policies that result from claims through the deathof the policyholder or maturity of the policy within the period of declaration or by concession onsurrender. No policyholder benefit provisions are recorded for future annual or final bonus declarations.

The policyholders’ liabilities of the regulated with-profits funds are accounted for under FRS 27.FRS 27 is underpinned by the FSA’s Peak 2 basis of reporting. This Peak 2 basis requires the value ofliabilities to be calculated as:

• A with-profits benefits reserve (WPBR); plus

• future policy related liabilities (FPRL); plus

• the realistic current liabilities of the fund.

The WPBR is primarily based on the retrospective calculation of accumulated asset shares but isadjusted to reflect future policyholder benefits and other outgoings.

The FPRL must include a market consistent valuation of costs of guarantees, options and smoothing,less any related charges, and this amount is determined using either a stochastic approach, hedgingcosts or a series of deterministic projections with attributed probabilities.

The assumptions used in the stochastic models are calibrated to produce risk-free returns on eachasset class. Volatilities of, and correlations between, investment returns from different asset classes areas determined by the Group’s Portfolio Management Group but are also market consistent.

The cost of guarantees, options and smoothing is very sensitive to the bonus, market valuereduction (MVR) and investment policies the Group employs and therefore the stochastic modelingincorporates a range of management actions that would help to protect the fund in adverse scenarios.Substantial flexibility has been included in the modeled management actions in order to reflect thediscretion that the Group retains in adverse investment conditions, thereby avoiding the creation ofunreasonable minimum capital requirements. The management actions assumed are consistent withmanagement’s policy for with-profits funds and the disclosures made in the publicly available Principlesand Practices of Financial Management.

Under FRS 27: for the UK with-profits funds:

• No deferred acquisition costs and related deferred tax are recognized; and

• adjusted realistic basis liabilities instead of MSB liabilities are recognized.

Adjusted realistic basis liabilities represent the Peak 2 basis realistic liabilities for with-profitsbusiness included in Form 19 of the FSA regulatory returns, but after excluding the element for theshareholders’ share of the future bonuses. This latter item is recognized as a liability for the purposes ofregulatory returns but, for accounting purposes under FRS 27, consistent with the current basis offinancial reporting, shareholder transfers are recognized only on declaration.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Unallocated surplus

The unallocated surplus represents the excess of assets over policyholder liabilities for the Group’swith-profits funds. As allowed under IFRS 4, the Group has opted to continue to record unallocatedsurplus of with-profits funds wholly as a liability. The annual excess (shortfall) of income overexpenditure of the with-profits funds, after declaration and attribution of the cost of bonuses topolicyholders and shareholders, is transferred to (from) the unallocated surplus each year through acharge (credit) to the income statement. The balance retained in the unallocated surplus representscumulative income arising on the with-profits business that has not been allocated to policyholders orshareholders. The balance of the unallocated surplus is determined after full provision for deferred taxon unrealized appreciation on investments.

Other insurance contracts (i.e. contracts which contain significant insurance risk as definedunder IFRS 4)

For these contracts UK GAAP has been applied, which reflects the MSB. Under this basis thefollowing approach applies:

Other UK insurance contracts

Other UK insurance contracts that contain significant insurance risk include unit-linked, annuity andother non-profit business. For the purposes of local regulations, segregated accounts are established forlinked business for which policyholder benefits are wholly or partly determined by reference to specificinvestments or to an investment-related index. The interest rates used in establishing policyholderbenefit provisions for pension annuities in the course of payment are adjusted each year. Mortality ratesused in establishing policyholder benefit provisions were based on published mortality tables adjusted toreflect actual experience.

Overseas subsidiaries

The assets and liabilities of insurance contracts of overseas subsidiaries are determined initiallyusing local GAAP bases of accounting with subsequent adjustments where necessary to comply with theGroup’s accounting policies.

Jackson

The future policyholder benefit provisions for Jackson’s conventional protection-type policies aredetermined using the net level premium method under US GAAP principles and assumptions as of theissue date as to mortality, interest, policy lapses and expenses plus provisions for adverse deviations. Fornon-conventional protection-type policies, the policyholder benefit provision included within policyholderliabilities in the consolidated balance sheet is the policyholder account balance.

For the business of Jackson, the determination of the expected emergence of margins, againstwhich the amortization profile of the DAC asset is established, is dependent on certain key assumptions.For single premium deferred annuity business, the key assumption is the expected long-term spreadbetween the earned rate and the rate credited to policyholders. For variable annuity business, the keyassumption is the expected long-term level of equity market returns which, for 2007, 2006 and 2005,

F-29

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

was 8.4 per cent per annum implemented using a mean reversion methodology. These returns affect thelevel of future expected profits through their effects on fee income and the required level of provisionfor guaranteed minimum death benefit claims.

Jackson accounts for the majority of its investment portfolio on an available-for-sale basis (seeinvestment policies above) whereby unrealized gains and losses are recognized directly in equity. Aspermitted by IFRS 4, Jackson has used shadow accounting. Under shadow accounting, to the extent thatrecognition of unrealized gains or losses on available-for-sale securities causes adjustments to thecarrying value and amortization patterns of DAC and deferred income, these adjustments are recognizeddirectly in equity to be consistent with the treatment of the gains or losses on the securities.

Asian operations

Except for the operations in Taiwan, Vietnam and Japan, the future policyholder benefit provisionsfor Asian businesses are determined in accordance with methods prescribed by local GAAP adjusted tocomply, where necessary, with UK GAAP. For the Hong Kong business, which is a branch of the PAC,and the Singapore and Malaysian operations the valuation principles and sensitivities to changes ofassumptions of conventional with-profits and other protection-type policies are similar to those describedabove for equivalent products written by the UK operations.

For the operations in Taiwan, Vietnam and Japan, countries where local GAAP is not appropriate inthe context of the previously applied MSB, accounting for insurance contracts is based on US GAAP. Forthese three operations the business written is primarily non-participating and linked business. The futurepolicyholder benefit provisions for non-linked business are determined using the net level premiummethod, with an allowance for surrenders, maintenance and claim expenses.

Rates of interest used in establishing the policyholder benefit provisions vary by operationdepending on the circumstances attaching to each block of business. Where appropriate, liabilities forparticipating business for these three operations include provisions for the policyholders’ interest inrealized investment gains and other surpluses that have yet to be declared as bonuses.

Although the basis of valuation of Prudential’s overseas operations is in accordance with therequirements of the Companies Act 1985 and ABI SORP, the valuation of policyholder benefit provisionsfor these businesses may differ from that determined on a UK MSB for UK operations with the samefeatures.

Liability adequacy

The Group performs liability adequacy testing on its insurance provisions to ensure that the carryingamounts of provisions (less related DAC and present value of in-force business—see policy on BusinessAcquisitions and Disposals) is sufficient to cover current estimates of future cash flows. Whenperforming the liability adequacy test, the Group discounts all contractual cash flows and compares thisamount to the carrying value of the liability. Any deficiency is immediately charged to the incomestatement.

F-30

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Reinsurance

In the normal course of business, the Group seeks to reduce loss exposure by reinsuring certainlevels of risk in various areas of exposure with other insurance companies or reinsurers. An asset orliability is recognized in the consolidated balance sheet representing premiums due to or payments duefrom reinsurers and the share of benefits and claims recoverable from reinsurers. The measurement ofreinsurance assets is consistent with the measurement of the underlying direct insurance contracts.

Gains arising on the purchase of reinsurance contracts by Jackson are deferred and amortized overthe contract duration. Any loss is recognized in the income statement immediately.

Investment contracts (contracts which do not contain significant insurance risk as definedunder IFRS 4)

For investment contracts with discretionary participation features, the accounting basis is consistentwith the accounting for similar with-profits insurance contracts. Other investment contracts areaccounted for on a basis that reflects the hybrid nature of the arrangements whereby part is accountedfor as a financial instrument under IAS 39 and the investment management service component isaccounted for under IAS 18.

For those investment contracts in the US with fixed and guaranteed terms, the Group uses theamortized cost model to measure the liability. On contract inception, the liability is measured at fairvalue less incremental, directly attributable acquisition costs. Remeasurement at future reporting dates ison an amortized cost basis utilizing an effective interest rate methodology whereby the interest rateutilized discounts to the net carrying amount of the financial liability.

Those investment contracts without fixed and guaranteed terms are designated at fair value throughprofit and loss. Fair value is based upon the fair value of the underlying assets of the fund. Where thecontract includes a surrender option its carrying value is subject to a minimum carrying value equal to itssurrender value.

(c) Other assets, liabilities, income and expenditure

Basis of consolidation

The Group consolidates those entities it is deemed to control. The degree of control is determinedby the ability of the Group to govern the financial and operating policies of an entity in order to obtainbenefits. Consideration is given to other factors such as potential voting rights.

The Group has consolidated some special purpose entities (SPEs), such as funds holdingcollateralized debt obligations (CDOs), where equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for the entity to finance its activitieswithout additional subordinated financial support from other parties. These SPEs are consolidatedbecause the Group is deemed to control them under IFRS.

The Group holds investments in internally and externally managed Open-ended InvestmentCompanies (OEICs) and unit trusts. The Group’s percentage ownership levels in these entities canfluctuate from day to day according to changes in the Group’s and third party participation in the funds.

F-31

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

In instances where the Group’s ownership of internally managed funds declines marginally below 50 percent and, based on historical analysis and future expectations the decline in ownership is expected to betemporary, the funds continue to be consolidated as subsidiaries under IAS 27.

Where the Group exercises significant influence or has the power to exercise significant influenceover an entity, generally through ownership of 20 per cent or more of the entity’s voting rights, butdoes not control the entity, then this is considered to be an investment in an associate. With theexception of those referred to below, the Group’s investments in associates are recorded at the Group’sshare of the associates’ net assets. The carrying value of investments in associates is adjusted each yearfor the Group’s share of the entities’ profit or loss. This does not apply to investments in associates heldby the Group’s insurance or investment funds including the venture capital business or mutual funds andunit trusts, which are carried at fair value through profit and loss.

The Group’s investments in joint ventures are recognized using proportional consolidation wherebythe Group’s share of an entity’s individual balances are combined line-by-line with similar items into theGroup financial statements.

Other interests in entities, where significant influence is not exercised, are carried as investments atfair value through profit and loss.

The consolidated financial statements of the Group include the assets, liabilities and results of theCompany and subsidiary undertakings in which Prudential has a controlling interest, using accountsdrawn up to December 31, 2007 except where entities have non-coterminous year ends. In such cases,the information consolidated is based on the accounting period of these entities and is adjusted formaterial changes up to December 31. Accordingly, the information consolidated is deemed to cover thesame period for all entities throughout the Group. The results of subsidiaries are included in thefinancial statements from the date acquired to the effective date of disposal. All inter-companytransactions are eliminated on consolidation. Results of asset management activities include those formanaging internal funds.

Investment properties

Investments in leasehold and freehold properties not for occupation by the Group are carried at fairvalue, with changes in fair value included in the income statement. Properties are valued annually eitherby the Group’s qualified surveyors or professional external valuers using the Royal Institution ofChartered Surveyors (RICS) guidelines. The RICS guidelines apply separate assumptions to the value ofthe land, buildings and tenancy associated with each property. Each property is externally valued at leastonce every three years. The cost of additions and renovations is capitalized and considered whenestimating fair value.

Leases of investment property where the Group has substantially all the risks and rewards ofownership are classified as finance leases (leasehold property). Finance leases are capitalized at thelease’s inception at the lower of the fair value of the leased property and the present value of theminimum lease payments. Where a lease has a contingent rent element, the rent is calculated inaccordance with individual lease terms and charged as an expense as incurred.

F-32

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Pension schemes

The Group operates a number of pension schemes around the world. The largest of these schemesis the PSPS, a defined benefit scheme. The Group also operates defined contribution schemes. Definedcontribution schemes are schemes where the Company pays contributions into a fund and the Companyhas no legal or constructive obligation to pay further contributions should the assets of that fund beinsufficient to pay the employee benefits relating to employee service in both current and prior periods.Defined benefit schemes are post-employment benefit plans that are not defined contribution schemes.

For the Group’s defined benefit schemes, if the present value of the defined benefit obligationexceeds the fair value of the scheme assets, then a liability is recorded in the Group’s balance sheet.The Group utilizes the projected unit credit method to calculate the defined benefit obligation. Estimatedfuture cash flows are then discounted at a high-quality corporate bond rate to determine its presentvalue. These calculations are performed by independent actuaries.

The plan assets of the Group’s pension schemes exclude several insurance contracts that have beenissued by the Group. These assets are excluded from plan assets in determining the pension obligationrecognized in the consolidated balance sheet.

The aggregate of the actuarially determined service costs of the currently employed personnel andthe unwind of discount on liabilities at the start of the period, less the expected investment return onscheme assets at the start of the period, is charged to the income statement. Actuarial gains and lossesas a result of changes in assumptions or experience variances are also charged or credited to the incomestatement.

Contributions to the Group’s defined contribution schemes are expensed when due. Once paid, theGroup has no further payment obligations. Any prepayments are reflected as an asset on the balancesheet.

Share-based payments

The Group offers share award and option plans for certain key employees and a Save As You Earn(SAYE) plan for all UK and certain overseas employees. The arrangements for distribution to employeesof shares held in trust relating to share award plans and for entitlement to dividends depend upon theparticular terms of each plan. Shares held in trust relating to these plans are conditionally gifted toemployees.

The compensation expense charged to the income statement is primarily based upon the fair valueof the options granted, the vesting period and the vesting conditions. The Group revises its estimate ofthe number of options likely to be exercised at each balance sheet date and adjusts the charge to theincome statement accordingly. Where the share-based payment depends upon vesting outcomesattaching to market-based performance conditions, additional modeling is performed to estimate the fairvalue of the awards. No subsequent adjustment is then made to the fair value charge for awards that donot vest on account of these performance conditions not being met.

The Company has established trusts to facilitate the delivery of Prudential plc shares underemployee incentive plans and savings-related share option schemes. None of the trusts that hold sharesfor employee incentive and savings plans continue to hold these shares once they are issued to

F-33

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

employees. The cost to the Company of acquiring these treasury shares held in trusts is shown as adeduction from shareholders’ equity.

Tax

The Group’s UK subsidiaries each file separate tax returns. Jackson and other foreign subsidiaries,where permitted, file consolidated income tax returns. In accordance with UK tax legislation, where onedomestic UK company is a 75 per cent owned subsidiary of another UK company or both are 75 percent owned subsidiaries of a common parent, the companies are considered to be within the same UKtax group. For companies within the same tax group, trading profits and losses arising in the sameaccounting period may be offset for purposes of determining current and deferred taxes.

Current tax expense is charged or credited to operations based upon amounts estimated to bepayable or recoverable as a result of taxable operations for the current year. To the extent that losses ofan individual UK company are not offset in any one year, they can be carried back for one year orcarried forward indefinitely to be offset against profits arising from the same company.

Deferred taxes are provided under the liability method for all relevant temporary differences, beingthe difference between the carrying amount of an asset or liability in the balance sheet and its value fortax purposes. IAS 12, ‘Income Taxes’ does not require all temporary differences to be provided for, inparticular, the Group does not provide for deferred tax on undistributed earnings of subsidiaries wherethe Group is able to control the timing of the distribution and the temporary difference created is notexpected to reverse in the foreseeable future. The tax effects of losses available for carry forward arerecognized as an asset. Deferred tax assets are only recognized when it is probable that future taxableprofits will be available against which these losses can be utilized. Deferred tax related to charges orcredits taken directly to equity is also credited or charged directly to equity and is subsequentlyrecognized in the income statement together with the deferred gain or loss.

The tax charge for long-term business includes tax expense on with-profits funds attributable toboth the policyholders and the shareholders. Different tax rules apply under UK law depending uponwhether the business is life insurance or pension business. Tax on the life insurance business is basedon investment returns less expenses attributable to that business. Tax on the pension business is basedon the shareholders’ profits or losses attributable to that business. The shareholders’ portion of thelong-term business is taxed at the shareholders’ rate with the remaining portion taxed at rates applicableto the policyholders.

Basis of presentation of tax charges

Tax charges in the income statement reflect the aggregate of the shareholder tax on the long-termbusiness result and on the Group’s other results.

Under UK Listing Authority rules, profit before tax is required to be presented. This requirement,coupled with the fact that IFRS does not contemplate tax charges which are attributable to policyholdersand unallocated surplus of with-profits funds and unit-linked policies, necessitates the reporting of totaltax charges within the presented results. The result before all taxes (i.e. ‘profit before tax’ as shown inthe income statement) represents income net of post-tax transfers to unallocated surplus of with-profitsfunds, before tax attributable to policyholders and unallocated surplus of with-profits funds, unit-linked

F-34

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

policies and shareholders. Separately within the income statement, ‘profit before tax attributable toshareholders’ is shown after deduction of taxes attributable to policyholders and unallocated surplus ofwith-profits funds and unit-linked policies. Tax charges on this measure of profit reflect the tax chargesattributable to shareholders. In determining the tax charges attributable to shareholders, the Group hasapplied a methodology consistent with that previously applied under UK GAAP reflecting the broadprinciples underlying the tax legislation of life assurance companies.

Property, plant and equipment

All property, plant and equipment such as owner occupied property, computer equipment andfurniture and fixtures, are carried at depreciated cost. Costs including expenditure directly attributable tothe acquisition of the assets are capitalized. Depreciation is calculated and charged on a straight-linebasis over an asset’s estimated useful life. The residual values and useful lives are reviewed at eachbalance sheet date. If the carrying amount of an asset is greater than its recoverable amount then itscarrying value is written down to that recoverable amount.

Leasehold improvements to owner occupied property are depreciated over the life of the lease.Assets held under finance leases are capitalized at their fair value.

Business acquisitions and disposals

Business acquisitions are accounted for by applying the purchase method of accounting, whichadjusts the net assets of the acquired company to fair value at the date of purchase. The excess of thecosts of acquisition over the fair value of the assets and liabilities of the acquired entity is recorded asgoodwill. Should the fair value of the identifiable assets and liabilities of the entity exceed the cost ofacquisition then this amount is recognized immediately in the income statement. Income and expensesof acquired entities are included in the income statement from the date of acquisition. Revenues andexpenses of entities sold during the period are included in the income statement up to the date ofdisposal. The gain or loss on disposal is calculated as the difference between sale proceeds, net ofselling costs, less the net assets of the entity at the date of disposal.

For life insurance company acquisitions, the adjusted net assets include an identifiable intangibleasset for the present value of in-force business which represents the profits that are expected to emergefrom the acquired insurance business. The present value of in-force business is calculated using bestestimate actuarial assumptions for interest, mortality, persistency and expenses and is amortized over theanticipated lives of the related contracts in the portfolio. An intangible asset may also be recognized inrespect of acquired investment management contracts representing the fair value of contractual rightsacquired under these contracts.

The Company uses the economic entity method to purchase minority interests. Under the economicentity method any difference between consideration and the share of net assets acquired is recordeddirectly in equity.

Goodwill

Goodwill arising on acquisitions of subsidiaries and businesses is capitalized and carried on theGroup balance sheet as an intangible asset at initial value less any accumulated impairment losses.

F-35

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Goodwill impairment testing is conducted annually and when there is an indication of impairment. Forthe purposes of impairment testing, goodwill is allocated to cash generating units. These cash generatingunits reflect the smallest group of assets that includes the goodwill and generates cash flows that arelargely independent of the cash inflows from other groups of assets. If the carrying amount of the cashgenerating unit exceeds its recoverable amount then the goodwill is considered impaired. Impairmentlosses are recognized immediately in the income statement and may not be reversed in future periods.

Acquired intangible assets

Intangible assets acquired on the purchase of a subsidiary or portfolio of contracts are valued atacquisition and carried at cost less amortization and any accumulated impairment losses. Amortizationcalculated is charged on a straight-line basis over the estimated useful life of the assets. The residualvalues and useful lives are reviewed at each balance sheet date.

Cash and cash equivalents

Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks,treasury bills and other short-term highly liquid investments with less than 90 days maturity from thedate of acquisition.

Rights of offset

Assets and liabilities in the consolidated financial statements are only reported on a net basis whenthere is a legally enforceable right to offset and there is an intention to settle on a net basis.

Segments

In accordance with IAS 14, ‘Segment Reporting’ the Group reports its results and certain otherfinancial information by primary and secondary segments. The Group’s primary segments are its businesssegments, namely, long-term business, asset management and, prior to the sale of Egg in the first half of2007, banking operations. The Group’s secondary segments are its geographical segments, namely, UK,US and Asia.

Shareholders’ dividends

Dividends to shareholders are recognized as a liability in the period in which they are declared.Where scrip dividends are issued, the value of such shares, measured as the amount of the cashdividend alternative, is credited to reserves and the amount in excess of the nominal value of the sharesissued is transferred from the share premium account to retained earnings.

Share capital

Where there is no obligation to transfer assets, shares are classified as equity. The differencebetween the proceeds received on issue of the shares, net of share issue costs, and the nominal valueof the shares issued, is credited to share premium. Where the Company purchases shares for thepurposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from

F-36

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

retained earnings. Upon issue or sale any consideration received is credited to retained earnings net ofrelated costs.

Foreign exchange

The Group’s consolidated financial statements are presented in pounds sterling, the Group’spresentation currency. Accordingly, the results and financial position of foreign subsidiaries must betranslated into the presentation currency of the Group from their functional currencies, i.e. the currencyof the primary economic environment in which the entity operates. All assets and liabilities of foreignsubsidiaries are converted at year end exchange rates whilst all income and expenses are converted ataverage exchange rates where this is a reasonable approximation of the rates prevailing on transactiondates. The impact of these currency translations is recorded as a separate component of equity.

Foreign currency borrowings that have been used to provide a hedge against Group equityinvestments in overseas subsidiaries are translated at year end exchange rates and movements takendirectly to shareholders’ equity. Other foreign currency monetary items are translated at year endexchange rates with changes recognized in the income statement. Foreign currency transactions aretranslated at the spot rate prevailing at the time.

A5: New accounting pronouncements

The following standards, interpretations and amendments have either been effective and adopted in2007 or have been issued but are not yet effective in 2007, including those which have not yet beenadopted in the EU. This is not intended to be a complete list as only those standards, interpretationsand amendments that are anticipated to have an impact upon the Group’s financial statements have beendiscussed.

Accounting pronouncements adopted in 2007

IFRS 7, ‘Financial Instruments: Disclosures’

IFRS 7 replaces IAS 30, ‘Disclosures in the Financial Statements of Banks and Similar FinancialInstitutions’, which dealt with disclosures for banking operations, and the disclosure requirements ofIAS 32, ‘Financial Instruments: Disclosure and Presentation’. The latter, therefore, becomes a standarddealing wholly with presentation of financial instruments. IFRS 7 is intended to complement theprinciples for recognizing, measuring and presenting financial assets and financial liabilities in IAS 32 andIAS 39, ‘Financial Instruments: Recognition and Measurement’. The objective of IFRS 7 is to requireentities to provide disclosures in their financial statements to enable the users of financial statements toevaluate the significance of financial instruments for the entity’s financial position and performance andthe nature and extent of risks arising from financial instruments to which the entity is exposed and howthe entity manages those risks. Consequential amendments have been made to other standards as aresult of the release of IFRS 7, notably IAS 1, ‘Presentation of Financial Statements’, and IFRS 4,‘Insurance Contracts’.

IFRS 7 was issued in August 2005 and became effective for annual periods beginning on or afterJanuary 1, 2007.

F-37

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

Amendment to IFRS 4, ‘Implementation Guidance’

Revised IFRS 4 implementation guidance was issued in December 2005 and is effective inconjunction with the adoption of IFRS 7 as discussed above. The revisions relate to disclosures aroundinsurance contracts.

Amendment to IAS 1, ‘Capital Disclosures’

As a result of the issue of IFRS 7, IAS 1 was amended in August 2005 to include a requirement todisclose information on the entity’s objectives, policies and processes for managing capital. Thisamendment became effective for annual periods beginning on or after January 1, 2007.

The Group adopted IFRS 7, Revised IFRS 4, ‘Implementation Guidance’ and the Amendment toIAS 1 in 2007. There is no impact on the profit and shareholders’ equity of the Group from the adoptionof these accounting pronouncements as their provisions relate to disclosure.

The additional disclosures required by IFRS 7, revised IFRS 4 and amendment to IAS 1 are shown inthe relevant sections of the notes on the Group financial statements. The adoption of thesepronouncements represents a change in accounting policy and the comparative 2006 and 2005 figureshave been disclosed accordingly.

IFRIC 9, ‘Reassessment of Embedded Derivatives’

IFRIC 9 requires assessment of whether embedded derivatives are required to be separated fromthe host contract and accounted for as derivatives when the Group first becomes a party to thecontracts. Subsequent reassessment is prohibited unless there is a change in the terms of the contractsthat significantly modifies the cash flows that otherwise would be required under the contracts, in whichcase a reassessment is required. This interpretation became effective for annual periods beginning on orafter June 1, 2006.

The adoption of IFRIC 9 did not have a material impact on the financial statements of the Group.

SOP 05-1, ‘Accounting by Insurance Enterprise for Deferred Acquisition Costs in Connection WithModifications or Exchanges of Insurance Contracts’

As explained in note A3, the assets and liabilities of the insurance contracts of Jackson and certainAsian operations, where the local GAAP is not well established, are accounted for based on insuranceaccounting prescribed by US GAAP. This is permitted by IFRS 4, where the assets and liabilities of lifeassurance contracts classified as insurance contracts with discretionary participating features under thisstandard are accounted for under previously applied GAAP, which in the case of Jackson and thesecertain Asian operations is US GAAP.

In September 2005, the American Institute of Certified Public Accountants (AICPA) issued SOP 05-1which affects the US GAAP insurance accounting. This SOP provides guidance on accounting byinsurance enterprises for deferred acquisition costs on internal replacements of insurance and investmentcontracts other than those specifically described in FAS 97, ‘Accounting and Reporting by InsuranceEnterprises for Certain Long-Duration and for Realized Gains and Losses from the Sale of Investments’.SOP 05-1 sets out conditions to determine whether contract modifications are considered as internal

F-38

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

replacements and result in a replacement contract that is substantially changed from the replacedcontract. SOP 05-1 then requires unamortized deferred acquisition costs, unearned revenue liabilitiesand deferred sales inducement assets from replaced contracts in an internal replacement transaction thatresults in a substantially changed contract not to be deferred in connection with the replacementcontract.

SOP 05-1 became effective and was adopted by Jackson and those certain Asian operations fromJanuary 2007. The adoption of the provisions of SOP 05-1 did not have a material impact on thefinancial statements of the Group.

Accounting pronouncements not yet effective

IFRS 8, ‘Operating Segments’

IFRS 8 requires entities to adopt the ‘management approach’ to reporting the financial performanceof its operating segments. The amount of each operating segment item to be reported is the measurereported to the chief operating decision maker, which in some instances will be non-GAAP. IFRS 8 willrequire the Group to provide an explanation of the basis on which the segment information is preparedand a reconciliation to the amount recognized in the Group’s consolidated financial statements. Thisstandard is effective for accounting periods beginning on or after January 1, 2009.

IFRIC 14, ‘IAS 19—The Limit on a Defined Benefit Asset, Minimum Funding Requirements and theirInteraction’

IFRIC 14 provides guidance on assessing the limit in IAS 19 on the amount of the surplus that canbe recognized as an asset and clarifies the impact of minimum funding requirements on such assets. Italso addresses when a minimum funding requirement might give rise to a liability. This interpretation iseffective for accounting periods beginning on or after January 1, 2008.

Amendments to IAS 1, ‘Presentation of Financial Statements: A Revised Presentation’

The revised version of IAS 1 is aimed at improving users’ ability to analyze and compare theinformation given in the financial statements.

The changes require information in financial statements to be aggregated on the basis of sharedcharacteristics and introduce a statement of comprehensive income. The revisions also include changesto the titles of some of the financial statements to reflect their functions more clearly: for example thebalance sheet is renamed a statement of financial position, though the new titles are not mandatory. Thisrevised standard is effective for accounting periods beginning on or after January 1, 2009.

Revised IFRS 3, ‘Business Combinations’ and Amendments to IAS 27, ‘Consolidated and SeparateFinancial Statements’

The revised IFRS 3 and amended IAS 27 are the outcomes of the second phase of the IASB’s andthe US Financial Accounting Standards Board’s (FASB) joint business combination project. The moresignificant changes from the revised IFRS 3 include:

• The immediate expensing of acquisition-related costs rather than inclusion in goodwill;

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

A: Background (Continued)

• recognition and measurement at fair value of contingent consideration at acquisition date withsubsequent changes to income;

• adoption of full goodwill method to measure non-controlling interests. IFRS 3 allows anaccounting policy choice, available on a transaction by transaction basis, to measurenon-controlling interests (previously minority interests) either at fair value (the full goodwillmethod) or the non controlling interests’ proportionate share of net assets of the acquiree(consistent with the previous IFRS 3 approach).

The amendments to IAS 27 reflect changes to the accounting for non-controlling (minority)interests.

The revised IFRS 3 and amended IAS 27 are effective for business combinations occurring in theaccounting period beginning on or after July 1, 2009.

Amendment to IFRS 2, ‘Share-based Payment: Vesting Conditions and Cancellations’

The amendment to IFRS 2 clarifies that vesting conditions are service conditions and performanceconditions only. Other features of a share-based payment are not vesting conditions. It also specifies thatall cancellations, whether by the entity or by other parties, should receive the same accountingtreatment. This amendment is effective for accounting periods beginning on or after January 1, 2009.

The Group is currently assessing the impact of the aforementioned standards, interpretations andamendments on its financial statements. Apart from IFRS 8, all of the other aforementionedpronouncements have not been adopted for use in the EU at December 31, 2007.

B: Summary of results

B1: Earnings per share

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholdersby the weighted average number of ordinary shares outstanding during the year, excluding those held inemployee share trusts, which are treated as cancelled.

For diluted earnings per share, the weighted average number of shares in issue is adjusted toassume conversion of all dilutive potential ordinary shares. The Group’s only class of dilutive potentialordinary shares are those share options granted to employees where the exercise price is less than theaverage market price of the Company’s ordinary shares during the year.

Net of taxand Basic Diluted

Before Tax Minority minority earnings earnings2007 tax (note F5) interests interests per share per share

£ million £ million £ million £ million Pence Pence

Based on profit for the year fromcontinuing operations . . . . . . . . . . 1,166 (382) (3) 781 31.9p 31.9p

Adjustment for post-tax results ofdiscontinued operations* . . . . . . . . 222 19 — 241 9.9p 9.8p

Based on profit for the year . . . . . . . 1,388 (363) (3) 1,022 41.8p 41.7p

F-40

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

Net of taxand Basic Diluted

Before Tax Minority minority earnings earnings2006 tax (note F5) interests interests per share per share

£ million £ million £ million £ million Pence Pence

Based on profit for the year fromcontinuing operations . . . . . . . . . . 1,372 (392) (3) 977 40.5p 40.5p

Adjustment for post-tax results ofdiscontinued operations* . . . . . . . . (150) 45 2 (103) (4.3)p (4.3)p

Based on profit for the year . . . . . . . 1,222 (347) (1) 874 36.2p 36.2p

Net of taxand Basic Diluted

Before Tax Minority minority earnings earnings2005 tax (note F5) interests interests per share per share

£ million £ million £ million £ million Pence Pence

Based on profit for the year fromcontinuing operations . . . . . . . . . . 954 (242) (12) 700 29.6p 29.6p

Adjustment for post-tax results ofdiscontinued operations* . . . . . . . . 47 1 0 48 2.0p 2.0p

Based on profit for the year . . . . . . . 1,001 (241) (12) 748 31.6p 31.6p

* Discontinued operations relate entirely to UK Banking operations following the sale on May 1, 2007 of Egg Banking plc toCiti. Note I6 provides details of the sale of Egg.

Number of shares

A reconciliation of the weighted average number of ordinary shares used for calculating basic anddiluted earnings per share is set out as below:

2007 2006 2005

millions millions millions

Weighted average shares for calculation of basic earnings per share . . . . . . 2,445 2,413 2,365Shares under option at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10 13Number of shares that would have been issued at fair value on assumed

option exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (7) (9)

Weighted average shares for calculation of diluted earnings per share . . . . . 2,448 2,416 2,369

F-41

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

B2: Dividends

2007 2006 2005

£ million £ million £ million

Dividends declared and paid in reporting periodParent company:

Interim dividend (2007: 5.70p, 2006: 5.42p, 2005: 5.30p per share) . . 140 131 126Final dividend for prior period (2006: 11.72p, 2005: 11.02p, 2004:

10.65p per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 267 252Subsidiary company payments to minority interests . . . . . . . . . . . . . . . 5 1 2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431 399 380

As a result of shares issued in lieu of dividends of £176 million (2006: £76 million; 2005:£52 million), dividends paid in cash, as set out in the consolidated cash flow statement, were£255 million (2006: £323 million; 2005: £328 million).

2007 2006 2005

£ million £ million £ million

Parent company dividends relating to reporting period:Interim dividend (2007: 5.70p, 2006: 5.42p, 2005: 5.30p per share) . . 140 131 126Final dividend (2007: 12.30p, 2006: 11.72p, 2005: 11.02p per share) . 304 287 267

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 444 418 393

A final dividend of 12.30 pence per share was proposed by the directors on March 13, 2008.Subject to shareholders’ approval, the dividend will be paid on May 20, 2008 to shareholders on theregister at the close of business on April 11, 2008. The dividend will absorb an estimated £304 millionof shareholders’ funds but a scrip dividend alternative has been offered to shareholders.

B3: Exchange translation

Exchange movement recorded directly in equity

2007 2006 2005

£ million £ million £ million

Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (97) 84US operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43) (384) 327Unallocated to a segment (Central funds) . . . . . . . . . . . . . . . . . . . . . 38 257 (143)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 (224) 268

The movements reflect the application of year end exchange rates at balance sheet rates andaverage exchange rates to the income statement. The movement unallocated to a segment reflects theretranslation of currency borrowings which have been designated as a net investment hedge to hedgethe currency risks related to the net investment in Jackson.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

The exchange rates applied were:

Closing Closing Closing Openingrate at rate at Average rate at Average rate atDec 31, Average Dec 31, for Dec 31, for Jan 1,

Local currency: £ 2007 for 2007 2006 2006 2005 2005 2005

Hong Kong . . . . . . . . . . . . . . . 15.52 15.62 15.22 14.32 13.31 14.15 14.92Japan . . . . . . . . . . . . . . . . . . . 222.38 235.64 233.20 214.34 202.63 200.13 196.73Malaysia . . . . . . . . . . . . . . . . . 6.58 6.88 6.90 6.76 6.49 6.89 7.30Singapore . . . . . . . . . . . . . . . . 2.87 3.02 3.00 2.93 2.85 3.03 3.13Taiwan . . . . . . . . . . . . . . . . . . 64.56 65.75 63.77 59.95 56.38 58.47 60.84US . . . . . . . . . . . . . . . . . . . . 1.99 2.00 1.96 1.84 1.72 1.82 1.92

B4: Group balance sheet

The Group’s primary reporting segments are long-term business, asset management and, prior todisposal, banking. The Group’s secondary reporting segments are geographical, namely the UK, the US,and Asia. Details of disclosures in accordance with the requirements of IAS 14 for segment assets andliabilities are shown below.

Details of the primary reporting segments are as follows:

Long-term business

This segment comprises long-term products that contain both a significant and insignificant elementof insurance risk. The products are managed together and not classified in this way other than foraccounting purposes. This segment also includes activity of the PAC with-profits funds’ ventureinvestments managed by PPM Capital and other investment subsidiaries held for the purpose ofsupporting the Group’s long-term business operations.

Asset management

The asset management segment is comprised of both internal and third-party asset managementservices, inclusive of portfolio and mutual fund management, where the Group acts as an advisor, andbroker-dealer activities. The nature of the products and the managing of the business differ from therisks inherent in the other business segments, and the regulatory environment of the asset managementindustry differs from that of the other business segments.

Discontinued banking operations

This segment, prior to the sale of Egg in the first half of 2007, consisted of products provided bythe Group’s online banking subsidiary, Egg. The nature of these products and the managing of thebusiness differed from the risks inherent in the other business segments, and the regulatory

F-43

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

environment of the banking industry differed from that of the other business segments. Note I6 includesdetails of the disposal of Egg Banking plc in the first half of 2007.

Long-term Asset Unallocated Intra-group2007 business management to a segment eliminations Total

£ million £ million £ million £ million £ million

Consolidated total assets . . . . . . . . 213,323 7,011 4,909 (5,499) 219,744

Consolidated total liabilities . . . . . . . (207,850) (5,282) (5,808) 5,499 (213,441)

Segment assets by geographical segment £ million

UK . . . . . . . . . . . . . . . . . . . . . . 161,696US . . . . . . . . . . . . . . . . . . . . . . . 42,758Asia . . . . . . . . . . . . . . . . . . . . . . 20,789Intra-group eliminations . . . . . . . . . (5,499)

Total assets per balance sheet . . . 219,744

Total DiscontinuedLong-term Asset Unallocated Intra-group continuing banking

2006 business management to a segment eliminations operations operations Total

£ million £ million £ million £ million £ million £ million £ million

Consolidated totalassets . . . . . . . . . . 201,936 5,565 3,672 (4,151) 207,022 9,498 216,520

Consolidated totalliabilities . . . . . . . . (196,650) (3,923) (5,272) 4,151 (201,694) (9,206) (210,900)

Segment assets by geographical segment £ million

UK . . . . . . . . . . . . . . . . . . . . . . . . 165,103US . . . . . . . . . . . . . . . . . . . . . . . . 39,695Asia . . . . . . . . . . . . . . . . . . . . . . . . 15,873Intra-group eliminations . . . . . . . . . . . (4,151)

Total assets per balance sheet . . . . 216,520

To explain more comprehensively the assets, liabilities and capital of the Group’s businesses it isappropriate to provide an analysis of the Group’s balance sheet by a mixture of primary and secondarysegments.

F-44

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

This analysis is shown below for the Group balance sheet at December 31, 2007.

Insurance operationsTotal Asset

UK US Asia insurance management Unallocated Intra-group Group2007 (note D2) (note D3) (note D4) operations (note E2) to a segment eliminations total

£ million £ million £ million £ million £ million £ million £ million £ million

AssetsIntangible assets attributable to

shareholders:Goodwill . . . . . . . . . . . . . . — — 111 111 1,230 — — 1,341Deferred acquisition costs and

other intangible assets . . . . . 157 1,928 745 2,830 6 — — 2,836

Total (note H1) . . . . . . . . . . . 157 1,928 856 2,941 1,236 — — 4,177

Intangible assets attributable toPAC with-profits fund:In respect of acquired

subsidiaries for venture fundand other investment purposes 192 — — 192 — — — 192

Deferred acquisition costs . . . . 19 — — 19 — — — 19

Total (note H2) . . . . . . . . . . . 211 — — 211 — 211

Total . . . . . . . . . . . . . . . . . . 368 1,928 856 3,152 1,236 — — 4,388

Other non-investment and non-cashassets (note H3 to H6) . . . . . . 4,433 1,651 762 6,846 521 4,457 (5,499) 6,325

Investment of long-term businessand other operations:Investment properties . . . . . . . 13,666 8 14 13,688 — — 13,688Investments accounted for using

the equity method . . . . . . . — — — — — 12 — 12Loans . . . . . . . . . . . . . . . . 1,245 3,258 1,087 5,590 2,334 — — 7,924Equity securities and portfolio

holdings in unit trusts . . . . . 60,829 15,507 9,804 86,140 17 — — 86,157Debt securities . . . . . . . . . . . 57,180 19,002 6,920 83,102 882 — — 83,984Other investments . . . . . . . . . 3,391 762 42 4,195 155 46 — 4,396Deposits . . . . . . . . . . . . . . 7,228 258 377 7,863 26 — — 7,889

Total investments (notes G1, H7and H8) . . . . . . . . . . . . . . . 143,539 38,795 18,244 200,578 3,414 58 — 204,050

Held for sale assets (note H9) . . . 30 — — 30 — — — 30Cash and cash equivalents

(note H10) . . . . . . . . . . . . . 1,869 169 679 2,717 1,840 394 — 4,951

Total assets . . . . . . . . . . . . . 150,239 42,543 20,541 213,323 7,011 4,909 (5,499) 219,744

F-45

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

Insurance operationsTotal Asset

UK US Asia insurance management Unallocated Intra-group Group2007 (note D2) (note D3) (note D4) operations (note E2) to a segment eliminations total

£ million £ million £ million £ million £ million £ million £ million £ million

Equity and liabilitiesEquityShareholders’ equity (note H11). . 1,364 2,690 1,369 5,423 1,677 (899) — 6,201Minority interests . . . . . . . . . . . 42 1 7 50 52 — — 102

Total equity . . . . . . . . . . . . . . 1,406 2,691 1,376 5,473 1,729 (899) — 6,303

LiabilitiesPolicyholder liabilities and

unallocated surplus ofwith-profits funds:Insurance contract liabilities

(note H12) . . . . . . . . . . . . 82,798 32,926 16,912 132,636 — — — 132,636Investment contract liabilities

with discretionary participationfeatures (note G1) . . . . . . . 29,466 — 84 29,550 — — — 29,550

Investment contract liabilitieswithout discretionaryparticipation features(note G1). . . . . . . . . . . . . 12,073 1,922 37 14,032 — — — 14,032

Unallocated surplus ofwith-profits funds (reflectingapplication of ‘realistic’ basisprovisions for UK regulatedwith-profits funds)(notes D2e(ii) and H12) . . . . 14,205 — 146 14,351 — — — 14,351

Total policyholder liabilities andunallocated surplus ofwith-profits funds . . . . . . . . . 138,542 34,848 17,179 190,569 — — — 190,569

Core structural borrowings ofshareholder-financed operations(note H13):Subordinated debt . . . . . . . . . — — — — — 1,570 — 1,570Other . . . . . . . . . . . . . . . . — 125 — 125 — 797 — 922

Total . . . . . . . . . . . . . . . . . . — 125 — 125 — 2,367 — 2,492

Operational borrowings attributableto shareholder-financedoperations (notes G1 and H13): . 12 591 — 603 1 2,477 — 3,081

Borrowings attributable towith-profits funds (notes G1and H13): . . . . . . . . . . . . . . 987 — — 987 — — — 987

Other non-insurance liabilities(notes G1, H4, H9, H14and H15) . . . . . . . . . . . . . . 9,292 4,288 1,986 15,566 5,281 964 (5,499) 16,312

Total liabilities . . . . . . . . . . . . . 148,833 39,852 19,165 207,850 5,282 5,808 (5,499) 213,441

Total equity and liabilities . . . . 150,239 42,543 20,541 213,323 7,011 4,909 (5,499) 219,744

F-46

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

This analysis is shown below for the Group balance sheet at December 31, 2006.Insurance operations

Total Asset TotalUK US Asia insurance management Unallocated Intra-group continuing Discontinued Group

2006 (note D2) (note D3) (note D4) operations (note E2) to a segment eliminations operations operations total

£ million £ million £ million £ million £ million £ million £ million £ million £ million £ million

AssetsIntangible assets attributable to

shareholders:Goodwill . . . . . . . . . . . — — 111 111 1,230 — — 1,341 — 1,341Deferred acquisition costs

and other intangible assets 167 1,712 612 2,491 6 — — 2,497 — 2,497

Total (note H1) . . . . . . . . 167 1,712 723 2,602 1,236 — — 3,838 — 3,838

Intangible assets attributable toPAC with-profits fund:In respect of acquired

subsidiaries for venturefund and other investmentpurposes . . . . . . . . . . 830 — — 830 — — — 830 — 830

Deferred acquisition costs . . 31 — — 31 — — — 31 — 31

Total (note H2) . . . . . . . . 861 — — 861 — — — 861 — 861

Total . . . . . . . . . . . . . . . 1,028 1,712 723 3,463 1,236 — — 4,699 — 4,699

Other non-investment andnon-cash assets (notes G1,H3 to H6) . . . . . . . . . . . 4,733 1,588 602 6,923 415 2,917 (4,151) 6,104 342 6,446

Investment of long-termbusiness and otheroperations:Investment properties . . . . 14,429 20 41 14,490 1 — — 14,491 — 14,491Investments accounted for

using the equity method . — — — — — 6 — 6 — 6Loans . . . . . . . . . . . . . 1,128 3,254 904 5,286 2,181 94 — 7,561 6,193 13,754Equity securities and

portfolio holdings in unittrusts . . . . . . . . . . . . 60,246 11,710 6,894 78,850 13 29 — 78,892 — 78,892

Debt securities . . . . . . . . 53,461 20,146 5,391 78,998 678 67 — 79,743 1,976 81,719Other investments . . . . . . 2,461 542 87 3,090 80 (28) — 3,142 78 3,220Deposits . . . . . . . . . . . 6,812 457 408 7,677 10 72 — 7,759 — 7,759

Total investments (notes G1,H7 and H8) . . . . . . . . . . 138,537 36,129 13,725 188,391 2,963 240 — 191,594 8,247 199,841

Held for sale assets (note H9) . 463 — — 463 — — — 463 — 463Cash and cash equivalents

(note H10) . . . . . . . . . . 1,979 99 618 2,696 951 515 — 4,162 909 5,071

Total assets . . . . . . . . . . 146,740 39,528 15,668 201,936 5,565 3,672 (4,151) 207,022 9,498 216,520

F-47

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

Insurance operationsTotal Asset Total

UK US Asia insurance management Unallocated Intra-group continuing Discontinued Group2006 (note D2) (note D3) (note D4) operations (note E2) to a segment eliminations operations operations total

£ million £ million £ million £ million £ million £ million £ million £ million £ million £ million

Equity and liabilitiesEquityShareholders’ equity

(note H11) . . . . . . . . . . 1,263 2,656 1,287 5,206 1,590 (1,600) — 5,196 292 5,488Minority interests . . . . . . . . 79 1 — 80 52 — — 132 — 132

Total equity . . . . . . . . . . . 1,342 2,657 1,287 5,286 1,642 (1,600) — 5,328 292 5,620

LiabilitiesBanking customer accounts

(note G1) . . . . . . . . . . . — — — — — — — — 5,554 5,554Policyholder liabilities and

unallocated surplus ofwith-profits funds:Insurance contract liabilities

(note H12) . . . . . . . . . 80,323 30,184 12,706 123,213 — — — 123,213 — 123,213Investment contract liabilities

with discretionaryparticipation features(note G1) . . . . . . . . . . 28,665 — 68 28,733 — — — 28,733 — 28,733

Investment contract liabilitieswithout discretionaryparticipation features(note G1) . . . . . . . . . . 11,453 1,562 27 13,042 — — — 13,042 — 13,042

Unallocated surplus ofwith-profits funds (reflectingapplication of ‘realistic’ basisprovisions for UK regulatedwith-profit funds)(notes D2e(ii) and H12) . . . 13,511 — 88 13,599 — — — 13,599 — 13,599

Total policyholder liabilities andunallocated surplus ofwith-profits funds . . . . . . 133,952 31,746 12,889 178,587 — — — 178,587 — 178,587

Core structural borrowingsof shareholder-financedoperations (note H13):Subordinated debt (otherthan Egg) . . . . . . . . . . — — — — — 1,538 — 1,538 — 1,538

Other . . . . . . . . . . . . . — 127 — 127 — 947 — 1,074 — 1,074

— 127 — 127 — 2,485 — 2,612 — 2,612

Egg subordinated debt (NoteH13) . . . . . . . . . . . . . — — — — — — — — 451 451

Total . . . . . . . . . . . . . . . — 127 — 127 — 2,485 — 2,612 451 3,063

Operational borrowingsattributable to shareholder-financed operations(notes G1 and H13) . . . . . 11 743 — 754 4 2,032 — 2,790 2,819 5,609

Borrowings attributable towith-profits funds (notes G1and H13) . . . . . . . . . . . 1,776 — — 1,776 — — — 1,776 — 1,776

Other non-insurance liabilities(notes G1, H4, H9, H14and H15) . . . . . . . . . . . 9,659 4,255 1,492 15,406 3,919 755 (4,151) 15,929 382 16,311

Total liabilities . . . . . . . . . . 145,398 36,871 14,381 196,650 3,923 5,272 (4,151) 201,694 9,206 210,900

Total equity and liabilities . 146,740 39,528 15,668 201,936 5,565 3,672 (4,151) 207,022 9,498 216,520

F-48

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

B: Summary of results (Continued)

B5: Internal funds under management

Internal funds under management analysed by business area at December 31, 2007 were as follows:

2007 2006UK US Asia Total Total

£ million £ million £ million £ million £ million

Investment property . . . . . . . . . . . . . . . . . . . 13,666 8 14 13,688 14,491Equity securities . . . . . . . . . . . . . . . . . . . . . . 60,840 15,507 9,810 86,157 78,892Debt securities . . . . . . . . . . . . . . . . . . . . . . . 58,037 19,002 6,945 83,984 79,743Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,579 3,258 1,087 7,924 7,561Other investments . . . . . . . . . . . . . . . . . . . . 10,809 1,054 434 12,297 10,907

Total continuing operations . . . . . . . . . . . . . . . 146,931 38,829 18,290 204,050 191,594Discontinued banking operations . . . . . . . . . . . — — — — 8,247

Total internal funds under management . . . . . . . 146,931 38,829 18,290 204,050 199,841

C: Group risk management

(i) Overview

As a provider of financial services, including insurance, the Group’s business is the managedacceptance of risk. The control procedures and systems established within the Group are designed tomanage, rather than eliminate, the risk of failure to meet business objectives. They can only providereasonable and not absolute assurance against material misstatement or loss, and focus on aligning thelevels of risk-taking with the achievement of business objectives.

The Group’s internal control processes are detailed in the Group Governance Manual. This issupported by the Group risk framework, which provides an overview of the Group-wide philosophy andapproach to risk management. Where appropriate, more detailed policies and procedures have beendeveloped at Group and/or business unit levels. These include Group-wide mandatory policies oncertain operational risks, including: health, safety, fraud, money laundering, bribery, business continuity,information security and operational security. Additional guidelines are provided for some aspects ofactuarial and finance activity.

Prudential’s risk governance framework requires that all of the Group’s businesses and functionsestablish processes for identifying, evaluating and managing the key risks faced by the Group. The riskgovernance framework is based on the concept of ‘three lines of defence’: Risk management, riskoversight and independent assurance. Primary responsibility for strategy, performance management andrisk control lies with the Board, the Group Chief Executive and the chief executives of each businessunit. Risk oversight is provided by Group-level risk committees, Group Finance Director and the GroupRisk function, working with counterparts in the business units in addition to other Group Head Office(GHO) oversight functions. Independent assurance on the Group’s and business unit internal control andrisk management systems is provided by Group-wide Internal Audit reporting to the Group and businessunit audit committees.

F-49

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

C: Group risk management (Continued)

The Group’s risk reporting framework forms an important part of the Group’s business planningprocess. Business units carry out a review of risks as part of the annual preparation of their three-yearbusiness plan. This involves an assessment of the impact and likelihood of key risks and of theeffectiveness of controls in place to manage them, and is reviewed regularly throughout the year. Inaddition, business unit dialogue meetings involving Group and business unit executive management areheld regularly to review opportunities and risks to business objectives. Any mitigation strategiesinvolving large transactions (e.g. a material derivative transaction) would be subject to scrutiny at Grouplevel before implementation.

Additional information on the Group’s risk framework is included in the risk management section ofthe Group’s operating and financial review.

The management of the risk attached to the Group’s financial instruments and insurance liabilities,together with the inter-relationship with the management of capital may be summarized as follows:

(a) Group risk appetite

The Group risk appetite framework sets out the Group’s overall tolerance to risk exposures,approach to risk/return optimization and management of risk. The Group risk appetite statements setout the Group’s risk tolerance, or risk appetite, to ‘shocks’ to the key financial risk exposures (market,credit and insurance risk). Aggregate risk limits are defined in terms of earnings volatility and capitalrequirements:

(i) Earnings volatility:

The objectives of the limits are to ensure that (a) the volatility of earnings is consistent withstakeholder expectations, (b) the Group has adequate earnings (and cash flows) to service debt andexpected dividends and (c) that earnings (and cash flows) are managed properly across geographies andare consistent with the Group’s funding strategies.

(ii) Capital requirements:

The objectives of the limits are to ensure that (a) the Group is economically solvent, (b) the Groupachieves its desired target rating to meet its business objectives, (c) supervisory intervention is avoided,(d) any potential capital strains are identified, and (e) accessible capital is available to meet businessobjectives. The two measures used are EU Insurance Groups Directive (IGD) capital requirements andeconomic capital requirements.

Business units must establish suitable market, credit, underwriting and liquidity limits that maintainfinancial risk exposures within the defined Group risk appetite.

(b) Group counterparty exposure limits

In addition to business unit operational limits on credit risk, counterparty risk limits are also set atthe Group level. Limits on total Group-wide exposures to a single counterparty are specified for differentcredit rating ‘buckets’. Actual exposures are monitored against these limits on a quarterly basis.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

C: Group risk management (Continued)

(c) Risk mitigation

Prudential employs a range of risk mitigation strategies aimed at reducing the impact of a variety ofrisks. Key mitigation strategies include: adjustment of asset portfolios to reduce investment risks (suchas duration mismatches or overweight counterparty exposures); use of derivatives to hedge market risks;reinsurance programmes to limit insurance risk; and corporate insurance programmes to limit impact ofoperational risks. Revisions to business plans (such as reassessment of bonus rates on participatingbusiness and scaling back of target new business volumes) may also be used as a mitigating strategy.

(d) Asset—liability management

The Group’s approach is explained in section (vi) below.

(ii) Major risks

The Group publishes separately within its Form 20-F a section on key risk factors, which discussesinherent risks in the business and trading environment.

(iii) Market and financial risks

(a) Equity and interest rate risk

Market risk is the risk that fair value or future cash flows of a financial instrument or, in the case ofliabilities of insurance contracts, their carrying value will fluctuate because of changes in market prices.Prudential faces equity risk and interest rate risk because most of its assets are investments that areeither equity type investments and subject to equity price risk, or bonds, mortgages or cash deposits,the values of which are subject to interest rate risk. The amount of risk borne by Prudential’sshareholders depends on the extent to which its customers share the investment risk through thestructure of Prudential’s products.

The split of Prudential’s investments between equity investments and interest-sensitive instrumentsdepends principally on the type of liabilities supported by those investments and the amount of capitalPrudential has available. The nature of some liabilities allows Prudential to invest a substantial portion ofits investment funds in equity and property investments that Prudential believes produce greater returnsover the long term. On the other hand Prudential has some liabilities that contain guaranteed returnsand allow instant access (for example, interest-sensitive fixed annuities and immediate annuities), whichgenerally will be supported by fixed income investments.

(b) Foreign exchange risk

Prudential faces foreign exchange risk, primarily because its presentation currency is poundssterling, whereas approximately 39 per cent of Prudential’s profit after tax for the year endedDecember 31, 2007 came from Prudential’s US and Asian operations. The exposure relating to thetranslation of reported earnings is not separately managed although its impact is reduced by interestpayments on foreign currency borrowings and by the adoption of average exchange rates for thetranslation of foreign currency revenues.

F-51

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

C: Group risk management (Continued)

Approximately 70 per cent of the Group’s IFRS basis shareholders’ equity at December 31, 2007arose in Prudential’s US and Asian operations. To mitigate the exposure of the US component there areUS$1.55 billion of borrowings held centrally. The Group has also entered into a US$2 billion netinvestment hedge (see note G3). Net of the currency position arising from these instruments some40 per cent of the Group’s shareholders’ funds are represented by net assets in currencies other thansterling.

(c) Liquidity risk

Liquidity risk is the risk that Prudential may be unable to meet payment of obligations in a timelymanner at a reasonable cost or the risk of unexpected increases in the cost of funding at appropriatematurities or rates. Liquidity management in each business seeks to ensure that, even under adverseconditions, Prudential has access to the funds necessary to cover surrenders, withdrawals and maturingliabilities.

In practice, most of Prudential’s invested assets are marketable securities. This, combined with thefact that a large proportion of the liabilities contain discretionary surrender values or surrender charges,reduces the liquidity risk. The Group maintains committed borrowing and securities lending facilities.

(d) Credit risk

Credit risk is the risk that a counterparty or an issuer of securities, which Prudential holds in itsasset portfolio, defaults or another party fails to perform according to the terms of the contract. Some ofPrudential’s businesses, in particular Jackson, the PAC with-profits fund, Prudential’s UK pension annuitybusiness and, prior to the sale in the first half of 2007, Egg, held large amounts of interest-sensitiveinvestments that contain credit risk on which a certain level of defaults is expected. These expectedlosses are considered when Prudential determines the crediting rates, deposit rates and premium ratesfor the products that will be supported by these assets. The key shareholder businesses exposed tocredit risks are Jackson and, prior to disposal, Egg. Certain over-the-counter derivatives contain a creditrisk element that is controlled through evaluation of collateral agreements and master nettingagreements on interest rate and currency swaps. Prudential is also exposed to credit-related losses in theevent of non-performance by counterparties.

Further analysis of the credit quality for Jackson is shown in note D3 and for discontinued Eggbanking operations in note J7. Additional details on the credit quality of the debt security portfolios ofUK and Asian insurance operations are shown in notes D2 and D4.

(iv) Use of derivatives

In the UK and Asia, Prudential uses derivatives to reduce equity and credit risk, interest rate andcurrency exposures, and to facilitate efficient investment management. In the US, Prudential usesderivatives to reduce interest rate risk, to facilitate efficient portfolio management and to match liabilitiesunder annuity policies, and for certain equity-based product management activities.

Further details of the Group’s use of derivatives are explained in note G3.

F-52

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

C: Group risk management (Continued)

It is Prudential’s policy that cash or corresponding assets cover amounts at risk through derivativetransactions. Derivative financial instruments used to facilitate efficient portfolio management and forinvestment purposes are carried at fair value with changes in fair value included in long-term investmentreturns.

(v) Operational, compliance and fiscal risk

Operational risk is the risk of direct or indirect loss resulting from inadequate or failed internalprocesses people or systems or from external events. Operational risk can result from a variety offactors, including failure to obtain proper internal authorizations or maintain internal controls, failure todocument transactions properly, failure of operational and information security procedures or otherprocedural failures, computer system or software failures, other equipment failures, fraud, inadequatetraining or errors by employees. Compliance with internal rules and procedures designed to managethese risks is monitored by Prudential’s local management boards.

Internal compliance managers who report to the local management boards monitor adherence tolocal regulatory requirements. The head of Prudential’s Group Compliance function reports directly tothe Group Chief Executive who submits regular reports to the Board of Directors.

Compliance risk includes the possibility that transactions may not be enforceable under applicablelaw or regulation as well as the cost of rectification and fines, and also the possibility that changes inlaw or regulation could adversely affect Prudential’s position. Prudential seeks to minimize compliancerisk by seeking to ensure that transactions are properly authorized and by submitting new or unusualtransactions to legal advisers for review.

Prudential is exposed to certain fiscal risks arising from changes in tax laws and enforcementpolicies and in reviews by taxation authorities of tax positions taken by Prudential in recent years.Prudential manages this risk and risks associated with changes in other legislation and regulation throughongoing review by relevant departments of proposed changes to legislation and by membership ofrelevant trade and professional committees involved in commenting on draft proposals in these areas.

(vi) Asset/liability management

Prudential manages its assets and liabilities locally, in accordance with local regulatory requirementsand reflecting the differing types of liabilities of each business unit. Stochastic asset-liability modeling iscarried out locally by business units to perform dynamic solvency testing and assess capitalrequirements. Reserve adequacy testing under a range of scenarios and dynamic solvency analysis iscarried out, including under certain scenarios mandated by the US, the UK and Asian regulators.

A stochastic approach models the inter-relationship between asset and liability movements, takinginto account asset correlation and policyholder behavior, under a large number of possible scenarios.These scenarios are projected forward over a period of time, typically 25 years or longer, and theliabilities and solvency position of the fund are calculated in each scenario in each future year. Thisallows the identification of which extreme scenarios will have the most adverse effects and what thebest estimate outcome may be. The fund’s policy on management actions, including bonus andinvestment policy, are then set in order that they are consistent with the available capital and the

F-53

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

C: Group risk management (Continued)

targeted risk of default. This differs from a deterministic model, which would only consider the resultsfrom one carefully selected scenario.

For businesses that are most sensitive to interest rate changes, such as immediate annuity business,Prudential uses cash flow analysis to create a portfolio of fixed income securities whose value changes inline with the value of liabilities when interest rates change. This type of analysis helps protect profitsfrom changing interest rates. In the UK, the cash flow analysis is used in Prudential’s annuity businesswhile, in the US, it is used for its interest-sensitive and fixed index annuities and stable value productssuch as Guaranteed Investment Contracts (GICs). Perfect matching is not possible for interest-sensitiveand fixed index annuities because of the nature of the liabilities (which include guaranteed surrendervalues) and options for prepayment contained in the assets.

For businesses that are most sensitive to equity price changes, Prudential uses stochastic modelingand scenario testing to look at the expected future returns on its investments under different scenariosthat best reflect the large diversity in returns that equities can produce. This allows Prudential to devisean investment and with-profits policyholder bonus strategy that, on the model assumptions, allows it tooptimize returns to its policyholders and shareholders over time, while maintaining appropriate financialstrength. Prudential uses this method extensively in connection with its UK with-profits business.

All of Prudential’s investments are held either for risk management or investment purposes. This isbecause almost all of the investments support policyholder or customer liabilities of one form or another.Any assets that Prudential holds centrally that are not supporting customer liabilities are predominantlyinvested in short-term fixed income and fixed maturity securities.

(vii) Regulatory capital requirements

Regulatory capital requirements apply at an individual company level for the Group life assuranceand asset management business. These are described in sections D5 and E3 respectively. Capitalrequirements also applied for the Group’s discontinued banking operations, as described in note J8.

In addition, the Group as a whole is currently subject to the solvency requirements of the InsuranceGroups Directive (IGD) as implemented by the FSA. Previously, whilst Prudential owned Egg, it wasrequired to comply with the broadly equivalent requirements of the Financial Conglomerates Directive(FCD), as implemented by the FSA. Under both the IGD and FCD a continuous parent companysolvency test is applied. Under this test the surplus capital held in each of the regulated subsidiaries isaggregated with the free assets of non-regulated subsidiaries. From this total Group borrowings arededucted, other than subordinated debt issues which qualify as capital. No credit for the benefit ofdiversification is allowed for under this approach. The test is passed when this aggregate number ispositive, and a negative result at any point in time is a notifiable breach of UK regulatory requirements.

Due to the geographically diverse nature of Prudential’s operations, the application of theserequirements to Prudential is complex. In particular, for many of the Group’s Asian operations the assets,liabilities and capital requirements have to be recalculated based on FSA regulations as if the companieswere directly subject to FSA regulation.

The FSA has established a structure for determining how much hybrid debt can count as capitalwhich is similar to that used for banks. It categorizes capital as Tier 1 (equity and preference shares),

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

C: Group risk management (Continued)

Upper Tier 2 and Lower Tier 2. Up to 15 per cent of Tier 1 capital can be in the form of hybrid debtand is called ‘Innovative Tier 1’. At December 31, 2007 the Group held £763 million (December 31,2006: £763 million) of Innovative Tier 1 capital in the form of perpetual securities, £nil million(£250 million) of Upper Tier 2 and £932 million (£1,103 million) of Lower Tier 2 capital. Further detailson these amounts and other Group borrowings are shown in note H13.

At December 31, 2006, Prudential met the requirements of the FCD. In addition, during 2007,Prudential met the ‘hard test’ of the FSA under both the FCD and IGD. At December 31, 2007,Prudential met the requirements of the IGD.

In addition to obligations under subsidiary and Group regulatory requirements, Prudential applies aneconomic framework to its management of capital.

Economic capital provides a realistic and consistent view of Prudential’s capital requirements,allowing for diversification benefits. Two types of ‘economic capital’ approaches are applied. These are:

• Group economic capital under which the capital requirement is determinable based on amulti-year projection thus taking into account the long-term nature of Prudential’s liabilities; and

• One-year Value at Risk Capital (1-yr VaR Capital). This capital is the amount required to withstanda maximum loss over a time period of one year consistent with a confidence level of 99.5 percent. In additional to its risk management applications, the 1-yr VaR Capital framework is used forIndividual Capital Assessments in the UK and anticipated to form the basis of Prudential’s capitalmodeling for future regulatory reporting developments, such as Solvency II.

D: Life assurance business

D1: Group overview

(a) Products and classification for IFRS reporting

The measurement basis of assets and liabilities of long-term business contracts is dependent uponthe classification of the contracts under IFRS. Under IFRS 4, contracts are initially classified as beingeither ‘insurance’ contracts, if the level of insurance risk in the contracts is significant, or investmentcontracts, if the risk is insignificant.

Insurance contracts

Insurance contracts are permitted to be accounted for under previously applied GAAP. The Grouphas chosen to adopt this approach. However, as an improvement to accounting policy, permitted byIFRS 4, the Group has applied the measurement principles for with-profits contracts of UK regulatedentities and disclosures of the UK Standard FRS 27 from January 1, 2005. An explanation of theprovisions under FRS 27 is provided in note D2.

Under the previously applied GAAP, UK GAAP, the assets and liabilities of contracts are reported inaccordance with the MSB of reporting as set out in the ABI SORP.

F-55

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

The insurance contracts of the Group’s shareholder-backed business fall broadly into the followingcategories:

• UK insurance operations—bulk and individual annuity business, written primarily by Prudential Retirement Income Limited

and other categories of non-participating UK business;

• Jackson—fixed and variable annuity business and life insurance; and

• Prudential Corporation Asia—non-participating term, whole life, and unit-linked policies, together with accident and health

policies.

Investment contracts

Investment contracts are further delineated under IFRS 4 between those with and withoutdiscretionary participation features. For those contracts with discretionary participation features, IFRS 4also permits the continued application of previously applied GAAP. The Group has adopted thisapproach, again subject to the FRS 27 improvement.

For investment contracts that do not contain discretionary participation features, IAS 39 and, wherethe contract includes an investment management element, IAS 18, apply measurement principles toassets and liabilities attaching to the contract that may diverge from those previously applied.

Contracts of the Group, which are classified as investment contracts that do not containdiscretionary participation features, can be summarized as:

• UK—certain unit-linked savings and similar contracts;

• Jackson—GICs and funding agreements—minor amounts of ‘annuity certain’ contracts; and

• Prudential Corporation Asia—minor amounts for a number of small categories of business.

The accounting for the contracts of UK insurance operations and Jackson’s GICs and fundingagreements are considered in turn below:

(i) Certain UK unit-linked savings and similar contracts

Deferred acquisition costs

Acquisition costs are deferred to the extent that it is appropriate to recognize an asset thatrepresents the entity’s contractual right to benefit from providing investment management services andare amortized as the entity recognizes the related revenue. IAS 18 further reduces the costs potentiallycapable of deferral to incremental costs only. Deferred acquisition costs are amortized to the incomestatement in line with service provision.

F-56

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Deferred income reserves

These are required to be established under IAS 18 with amortization over the expected life of thecontract. The majority of the relevant UK contracts are single premium with the initial deferred incomereflecting the ‘front-end load’ i.e. the difference between the premium paid and the amount credited tothe unit fund. Deferred income is amortized to the income statement in line with service provision. Theamortization profile is either on a straight-line basis or, if more appropriate, a further deferral of incomerecognition is applied.

Sterling reserves

Prudent provisions established for possible future expenses not covered by future margins at apolicy level reflecting the regulatory approach in the UK are not permitted under IFRS 4.

(ii) Jackson—GICs and funding arrangements

Under a traditional GIC, the policyholder makes a lump sum deposit. The interest rate paid is fixedand established when the contract is issued. Funding agreements are of a similar nature but the interestrate may be floating, based on a rate linked to an external index. The US GAAP accountingrequirements for such contracts are very similar to those under IFRS on the amortized cost model forliability measurement.

(b) Concentration of risk

(i) Business accepted

The Group has a broadly based exposure to life assurance risk. This is achieved through thegeographical spread of the Group’s operations and, within those operations, through a broad mix ofproduct types. In addition, looking beyond pure insurance risk, the Group considers itself welldeveloped in its approach to assessment of diversification benefits through its economic capitalframework that is used for internal business management. The economic capital methodology seeks toapply a single yardstick to assess and quantify all risks attaching to the Group’s insurance business andassociated capital requirements.

Prudential’s internal Group economic capital requirement is defined as the minimum amount ofcapital that the Group needs to hold in order to remain economically solvent over a 25-year horizon,given a target probability of insolvency appropriate for AA-rated debt. The target confidence level isbased on historic default rates for AA-rated debt, and varies over the time horizon of the projection. Theeconomic capital requirement is calculated in respect of existing contractual and discretionary liabilitiesonly, excluding the impact of future new business and dividend distribution.

For the purposes of calculating Group economic capital, Group economic solvency is defined as theposition where both: (a) the capital balance of the parent company is positive, and (b) all business unitsare solvent on the applicable local regulatory basis. This definition of solvency allows the Group’s capitalposition to be assessed on an economic basis while taking into account the actual regulatory constraintsat the business unit level.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

The Group economic capital position is calculated using the Group Solvency Model (GSM)—anintegrated stochastic asset/liability model of the Group economic solvency position. Projected economicscenarios in the GSM are generated using a stochastic economic scenario generator that captures thecorrelations between different asset classes and geographies.

The Group regularly determines the level of capital required to cover the risks to its existingcontractual and discretionary insurance liabilities on an economic basis and its internal target solvencylevel. This level of required capital is determined after allowance for diversification across risk andgeographies and the capturing of future shareholders’ transfers from the business units. This level isthen compared with available capital on an equivalent basis (i.e. IFRS shareholders’ equity aftereliminating goodwill and including subordinated debt capital and valuation differences). The requiredcapital is then analyzed into its contributing parts by risk type namely market risk (including interest andequity risk), credit risk, underwriting, persistency and operational risk.

The largest risk exposure continues to be credit risks which reflect the relative size of exposure inJackson and the UK shareholder annuities business. However, credit risk has reduced due to the sale ofEgg and Jackson’s maturing fixed annuity business.

An example of the diversification benefits for Prudential is that adverse scenarios do not affect allbusiness units in the same way, providing natural hedges within the Group. For example, the Group’s USbusiness is sensitive to increasing interest rates, whereas, in contrast, several business units in Asiabenefit from increasing rates. Conversely, these Asian business units are sensitive towards low interestrates, whereas the US benefits from falling interest rates. The economic capital framework also takesinto account situations where factors are correlated, for example the extent of correlation between Asianand US economies.

(ii) Ceded business

The Group cedes certain business to other insurance companies. Although the ceding of insurancedoes not relieve the Group of liability to its policyholders, the Group participates in such agreements forthe purpose of managing its loss exposure. The Group evaluates the financial condition of its reinsurersand monitors concentration of credit risk from similar geographic regions, activities or economiccharacteristics of the reinsurers to minimise its exposure from reinsurer insolvencies. There are nosignificant concentrations of reinsurance risk. At December 31, 2007, 98 per cent of the reinsurancerecoverable insurance assets were ceded by the Group’s UK and US operations, of which 88 per cent ofthe balance were from reinsurers with Standard & Poor’s rating AA- and above. A similar position washeld at December 31, 2006.

(c) Guarantees

Notes D2(c), D3(c), D4(b) and D4(g) provide details of guarantee features of the Group’s lifeassurance products. In the UK, guarantees of the with-profits products are valued for accountingpurposes on a market consistent basis for 2007 as described in section D2(e)(ii). The UK business alsohas products with guaranteed annuity option features, mostly within SAIF, as described in section D2(c).There is little exposure to financial options and guarantees in the shareholder-backed business of the UKoperations. The US business annuity products have a variety of option and guarantee features as

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

described in section D3(c). Jackson’s derivative programme seeks to manage the exposures as describedin section D3(d). The most significant exposure for the Group arises on Taiwan whole of life policies asdescribed in section D4(g)(iii).

(d) Amount, timing and uncertainty of future cash flows from insurance contracts

The factors that affect the amount, timing and uncertainty of future cash flows from insurancecontracts depend upon the businesses concerned as described in subsequent sections. In general terms,the Group is managed by reference to a combination of measures. These measures include IFRS basisearnings, net shareholder cash flow to or from business units from or to central funds, and movementsin the present value of future expected distributable earnings of in-force long-term insurance business.The latter item when added to the net assets is commonly referred to as Embedded Value.

The Group prepares and publishes supplementary information in accordance with the EuropeanEmbedded Value (EEV) principles issued by the CFO Forum of European Insurance Companies in May2004 and expanded by the addition of Additional Guidance on EEV Disclosures published in October2005. Key elements of the EEV principles are the approach applied to allowing for risk and the use ofbest estimate assumptions to project future cash flows arising from the contracts.

The business covered by the EEV basis results includes both investment contracts as well asinsurance contracts (as defined under IFRS 4). Investment contracts form a relatively small part of theGroup’s long-term business as demonstrated by the carrying value of policyholder liabilities shown in theGroup balance sheet.

The projected cash flows are those expected to arise under the contracts such as those arising frompremiums, claims and expenses after appropriate allowance for future lapse behavior and mortality andmorbidity experience. The cash flows also include the expected future cash flows on assets coveringliabilities and encumbered capital.

Encumbered capital is based on the Group’s internal target for economic capital subject to itmeeting at least the local statutory minimum requirements. Economic capital is assessed using internalmodels but does not take credit for the significant diversification benefits that exist within the Group.

The valuation of the future cash flows also takes account of the ‘time value’ of option andguarantee features of the Group’s long-term business contracts. The time value reflects the variability ofeconomic outcomes in the future. Where appropriate, a full stochastic valuation is undertaken todetermine the value of the in-force business. Common principles are adopted across the Group for thestochastic asset model classes, for example, separate modeling of individual asset classes but withallowance for correlation between the various asset classes. In deriving the time value of financialoptions and guarantees, management actions in response to emerging investment and fund solvencyconditions are modeled. In all instances, the modeled actions are in accordance with approved localpractice and therefore reflect the options actually available to management. For the PAC with-profitssub-fund, the actions are consistent with those set out in the Principles and Practices of FinancialManagement.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

The present value of the future distributable earnings is calculated using a risk discount rate whichreflects both the time value of money and the risks associated with the cash flows that are not otherwiseallowed for. The risk allowance covers market and non-market risks.

Under Capital Asset Pricing Methodology (CAPM), the discount rate is determined as the aggregateof the risk-free rate and the risk margin for market risk. The latter is calculated as the ‘beta’ multipliedby the equity risk premium. Under CAPM, the beta of a portfolio or product measures its relativemarket risk. The risk discount rates reflect the market risk inherent in each product group and hence thevolatility of product cash flows. They are determined by considering how the profits from each productare impacted by changes in expected returns on various asset classes, and by converting this into arelative rate of return, it is possible to derive a product specific beta.

Product specific discount rates are used in order to reflect the risk profile of each major territoryand product group. No allowance is required for non-market risks where these are assumed to be fullydiversifiable. The majority of non-market risks are considered to be diversifiable. Finance theory cannotbe used to determine the appropriate component of beta for non-diversifiable non-market risks sincethere is no observable risk premium associated with it that is akin to the equity risk premium.Recognizing this, a pragmatic approach has been used. A constant margin of 50 basis points (2006: 50basis points) has been added to the risk margin derived for market risk to cover the non-diversifiablenon-market risks associated with the business. For the UK shareholder-backed annuity business anadditional margin of 100 basis points was used (2006: 100 basis points).

Product level betas are calculated each year. They are combined with the most recent product mixto produce appropriate betas and risk discount rates for each major product grouping.

(e) Sensitivity of IFRS basis profit or loss and equity to market and other risks

(i) Overview of risks by business unit

The financial assets and liabilities attaching to the Group’s life assurance business are, to varyingdegrees, subject to market and insurance risk and other changes of experience assumptions that mayhave a material effect on IFRS basis profit or loss and equity.

Market risk is the risk that the fair value or future cash flows of a financial instrument or, in thecase of liabilities of insurance contracts, their carrying value will fluctuate because of changes in marketprices. Market risk comprises three types of risk, namely:

• Currency risk: due to changes in foreign exchange rates,

• interest rate risk: due to changes in market interest rates, and

• other price risk: due to fluctuations in market prices (other than those arising from interest raterisk or currency risk).

Policyholder liabilities relating to the Group’s life assurance businesses are also sensitive to theeffects of other changes in experience, or expected future experience, such as for mortality, otherinsurance risk and lapse risk.

F-60

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

In addition, the profitability of the Group’s life assurance businesses and, as described in Section E,Asset management business, is indirectly affected by the performance of the assets coveringpolicyholder liabilities and related capital.

Three key points are to be noted, namely:

• The Group’s with-profit and unit-linked funds absorb most market risk attaching to the fund’sinvestments. Except for second order effects, for example on asset management fees andshareholders’ share of cost of bonuses for with-profits business, shareholder results are notdirectly affected by market value movements on the assets of these funds.

• The Group’s shareholder results are most sensitive to market risks for assets of shareholder-backed business.

• The main exposures of the Group’s IFRS basis results to market risk for life assurance operationson investments of shareholder-backed business are for debt securities.

The most significant items for which the IFRS basis profit or loss and equity for the Group’s lifeassurance business is sensitive to these variables are shown in the following tables. The distinctionbetween direct and indirect exposure is not intended to indicate the relative size of the sensitivity.

Market and credit risk

Investments/ Liabilities/ Insurance andType of business derivatives unallocated surplus Indirect exposure lapse risk

UK insurance operations (see also section D2(h))

With-profits Net neutral direct exposure (Indirect Investment Persistency risk tobusiness (including exposure only) performance subject future shareholderPrudential Annuities to smoothing transfersLimited) through declared

bonuses

SAIF sub-fund Net neutral direct exposure (Indirect Asset managementexposure only) fees earned by M&G

Unit-linked business Net neutral direct exposure (Indirect Investment Persistency riskexposure only) performance

through assetmanagement fees

Asset/liability mismatch risk

Shareholder-backed Credit risk Mortality experienceannuity business and assumptions for

Interest rate risk for longevityassets in excess ofliabilitiesi.e. representingshareholder capital

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Market and credit risk

Investments/ Liabilities/ Insurance andType of business derivatives unallocated surplus Indirect exposure lapse risk

US insurance operations (see also section D3(h))

All business Currency risk Persistency risk

Variable annuity Net effect of market risk arising from Investmentbusiness incidence of guarantee features and performance

variability of asset management fees offset through assetby derivative hedging programme management fees

Fixed indexed Derivative hedge Incidence of equity Spread difference Lapse risk but theannuity business programme to the participation features between earned rate effects of extreme

extent not fully and rate credited to events are mitigatedhedged against policyholders by the use ofliability and fund swaption contractsperformance

Fixed annuity Credit riskbusiness/GIC Interest rate riskbusiness

These risks arereflected in volatileprofit or loss andshareholders’ equityfor derivative valuemovements andimpairment losses,and, in addition, forshareholders’ equityfor value movementson fixed incomesecurities classifiedas ‘available for sale’under IAS 39

F-62

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Market and credit risk

Investments/ Liabilities/ Insurance andType of business derivatives unallocated surplus Indirect exposure lapse risk

Asian insurance operations (see also section D4(g))

All business Currency risk Persistency risk

With-profits Net neutral direct exposure (Indirect Investmentbusiness exposure only) performance subject

to smoothingthrough declaredbonuses

Unit-linked business Net neutral direct exposure (Indirect Investmentexposure only) performance

through assetmanagement fees

Non-participating Interest rate and Long-term interestbusiness Taiwan price risk rates

Other Interest rate and Long-term interestnon-participating price risk ratesbusiness

(ii) IFRS shareholder results—Exposures for market and other risk

Key Group exposures

The IFRS total profit for UK insurance operations has high potential sensitivity for changes tolongevity assumptions affecting the carrying value of liabilities to policyholders for shareholder-backedannuity business. In addition, the result is sensitive to temporary value movements on assets backingIFRS equity.

For Jackson, the sensitivity of IFRS profit to market and other risks arises primarily for the valuemovements on derivatives which are used to manage the liabilities to policyholders and backinginvestment assets of fixed annuity and other general account business. This feature is compounded bythe use of the US GAAP measurement basis for the assets and liabilities for the contracts of these typesof business, which are largely insensitive to current period market movements. In addition to theseeffects the Jackson IFRS equity is sensitive to the impact of interest rate and credit spread movementson the value of fixed income securities. Movements in unrealized appreciation on these securities areincluded as movement in equity (i.e. outside the income statement).

For Asian operations, other than possibly for the impact of any alteration to assumed long-terminterest rates in Taiwan, the result is mainly affected by the impact of market levels on unit-linkedbusiness persistency, and other insurance risk.

The Asian result is also affected by short-term value movements on the asset portfolio fornon-linked shareholder-backed business.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

M&G profits are affected primarily by movements in the growth in funds under management and ofthe effect of any impairment on the loan book of Prudential Capital.

Market and credit risk

UK insurance operations

With-profits business

• With-profits business

Shareholder results of UK with-profits business are sensitive to market risk only through theindirect effect of investment performance on declared policyholder bonuses.

The investment assets of the PAC with-profits fund are subject to market risk. However, changesin their carrying value, net of related changes to asset-share liabilities of with-profit contracts,affect the level of unallocated surplus of the fund. As unallocated surplus is accounted for as aliability under IFRS, movements in its value do not affect shareholders’ profit or equity.

The shareholder results of the UK with-profits fund correspond to the shareholders’ share of thecost of bonuses declared on the with-profits business. This currently corresponds to one-ninth ofthe cost of bonuses declared.

Investment performance is a key driver of bonuses, and hence the shareholders’ share of cost ofbonuses. Due to the ‘smoothed’ basis of bonus declaration the sensitivity to investmentperformance in a single year is low. However, over multiple periods it is important.

• Prudential Annuities Limited (PAL)

PAL’s business is not with-profit; it writes annuity business. However, as PAL is owned by thePAC with-profits sub-fund, changes in the carrying value of PAL’s assets and liabilities arereflected in the liability for unallocated surplus which as described above, changes to which donot affect shareholder results.

• Scottish Amicable Insurance Fund (SAIF)

SAIF is a ring-fenced fund in which, apart from asset management fees, shareholders have nointerest. Accordingly, the Group’s IFRS profit and equity are insensitive to the direct effects ofmarket risk attaching to SAIF’s assets and liabilities.

Shareholder-backed business

The factors that may significantly affect the IFRS results of UK shareholder-backed business are themortality experience and assumptions and credit risk attaching to the annuity business of PrudentialRetirement Income Limited and the PAC non-profit sub-fund.

• Prudential Retirement Income Limited (PRIL)

The assets covering PRIL’s liabilities are principally debt securities and other investments that areheld to match the expected duration and payment characteristics of the policyholder liabilities.

F-64

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

These liabilities are valued for IFRS reporting purposes by applying discount rates that reflect themarket rates of return attaching to the covering assets.

Except mainly to the extent of any minor asset/liability duration mismatch and exposure to creditrisk, the sensitivity of the Group’s results to market risk for movements in the carrying value ofPRIL’s liabilities and covering assets is broadly neutral on a net basis.

The main market risk sensitivity for PRIL arises from interest rate risk on the debt securitieswhich substantially represent IFRS equity. This equity comprises the net assets held within thelong-term fund of the company that cover regulatory basis liabilities that are not recognized forIFRS reporting purposes, for example contingency reserves, and shareholder capital held outsidethe long-term fund.

The principal items affecting the IFRS results for PRIL are mortality experience and assumptionsand credit risk.

• PAC non-profit sub-fund

The PAC non-profit sub-fund principally comprises annuity business previously written by ScottishAmicable Life, credit life, unit-linked and other non-participating business.

The financial assets covering the liabilities for those types of business are subject to market risk.However, for the annuity business the same considerations as described above for PRIL apply,whilst the liabilities of the unit-linked business change in line with the matching linked assets.Other liabilities of the PAC non-profit sub-fund are broadly insensitive to market risk.

• Other shareholder backed unit-linked business

Due to the matching of policyholder liabilities to attaching asset value movements the UKunit-linked business is not directly affected by market or credit risk. The principal factor affectingthe IFRS results is investment performance through asset management fees.

Jackson

The IFRS basis results of Jackson are highly sensitive to market risk on the assets covering liabilitiesfor fixed annuity, term, institutional and other variable annuity business not segregated in the separateaccounts.

Invested assets covering liabilities for these types of business and related capital compriseprincipally debt securities classified as available-for-sale. Value movements for these securities arereflected as movements in shareholders’ equity. Other invested assets and derivatives are carried at fairvalue with the value movements reflected in the income statement.

By contrast, the IFRS insurance liabilities for these types of business of Jackson, by the applicationof grandfathers GAAP under IFRS 4, are measured on US GAAP bases which with the exception ofcertain items covered by the equity hedging programme, are generally insensitive to temporary changesin market conditions or the short-term returns on the attaching asset portfolios.

These differences in carrying value give rise to potentially significant volatility in the IFRS incomestatement and shareholders’ equity.

F-65

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

In addition to these effects, the factors that most significantly affect the Jackson IFRS result are:

Variable annuity business—net effect of market risk arising from incidence of guarantee featuresand variability of asset management fees offset by derivative hedging performance.

Fixed annuity business—the spread differential between the earned rate and the rate credited topolicyholders; and

Fixed index annuity business—the spread differential between the earned rate and the rate creditedto policyholders and incidence of equity index participation features.

Asian operations

For Asian with-profits business the same features apply as described above for UK with-profitsbusiness. Similarly, as for other parts of the Group, for unit-linked business the main factor affectingIFRS basis results is investment performance through asset management fees.

The sensitivity of the IFRS basis results of the Group’s Asian operations to market risk is primarilyrestricted to the non-participating business.

This sensitivity is primarily reflected through the volatility of asset returns coupled with the fact thatthe accounting carrying value of liabilities to policyholders are only partially sensitive to changed marketconditions.

In addition to these features the overriding factor that affects IFRS basis results for Asiannon-participating business is the return on the assets covering the Taiwan whole of life policies. Thisfactor directly affects the actual return in any given reporting period. In addition though, themeasurement of the liabilities to policyholders and the carrying value of deferred acquisition costs forthis business is dependant upon an assessment of longer-term interest rates. This key feature isdescribed in more detail in notes D4(d) and (g)(iii).

Insurance and lapse risk

The features described above cover the main sensitivities of IFRS profit and loss and equity formarket, insurance and credit risk. Lapse and longevity risk may also be a key determination of IFRS basisresults with variable impacts.

In the UK, adverse persistency experience can effect the level of profitability from with-profits andunit-linked business. For with-profits business in any given year, the amount represented by theshareholders’ share of cost of bonus may be only marginally affected. However, altered persistencytrends may affect the embedded value of the business in force reflecting an altered value of futureexpected shareholder transfers.

By contrast, Group IFRS profit is particularly sensitive to longevity shocks that result in changes ofassumption for the UK shareholder-backed annuity business.

Jackson is sensitive to lapse risk. However, Jackson has swaption derivatives in place to amelioratethe effect of a sharp rise in interest rates, which would be the most likely cause of a sudden change inpolicyholder behavior.

F-66

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(iii) Impact of diversification on risk exposure

The Group enjoys significant diversification benefits. This arises because not all risk scenarios willhappen at the same time and across all geographic regions. The Group tests the sensitivities of results todifferent correlation factors such as:

Correlation across geographic regions

• Financial risk factors

• Non-financial risk factors.

Correlation across risk factors

• Longevity risk

• Expenses

• Persistency

• Other risks.

The effect of Group diversification is to significantly reduce the aggregate standalone volatility riskto the IFRS results. The effect is almost wholly explained by the correlations across risk types, inparticular longevity risk.

(f) Duration of liabilities

Under the terms of the Group’s contracts, as for life assurance contracts generally, the contractualmaturity date is the earlier of the end of the contract term, death, other insurable events or surrender.The Group has therefore chosen to provide details of liability duration that reflect the actuariallydetermined best estimate of the likely incidence of these factors on contract duration. Details are shownin sections D2(i), D3(i) and D4(h).

In the years 2003 to 2007, claims paid on the Group’s life assurance contracts including thoseclassified as investment contracts under IFRS 4 ranged from £11.8 billion to £17.1 billion. Indicatively itis to be expected that of the Group’s policyholder liabilities (excluding unallocated surplus) atDecember 31, 2007 of £176 billion, the amounts likely to be paid in 2008 will be of a similar magnitude.

D2: UK insurance operations

(a) Summary balance sheet

In order to explain the different types of UK business and fund structure, the balance sheet of theUK insurance operations may be analyzed by the assets and liabilities of the Scottish Amicable Insurance

F-67

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Fund (SAIF), the PAC with-profits sub-fund, PRIL, unit-linked and other business. The assets andliabilities of these funds and subsidiaries are shown in the table below.

PAC with-profits sub-fund (note i) Other funds and subsidiaries

Scottish UK InsuranceAmicable Excluding Prudential Prudential operationsInsurance Prudential Annuities RetirementFund Annuities Limited Total Income Unit-linked Other 2007 2006

(note ii) Limited (note iii) (note iv) Limited business business Total Total Total

£ million £ million £ million £ million £ million £ million £ million £ million £ million £ millionAssetsIntangible assets

attributable toshareholders:Deferred acquisition

costs and otherintangible assets . . . . — — — — — 55 102 157 157 167

— — — — — 55 102 157 157 167

Intangible assetsattributable to PACwith-profits fund:In respect of acquired

subsidiaries forventure fund andother investmentpurposes . . . . . . . . — 192 — 192 — — — — 192 830Deferred acquisition

Costs . . . . . . . . . 4 15 — 15 — — — — 19 31

4 207 — 207 — — — — 211 861

Total . . . . . . . . . . 4 207 — 207 — 55 102 157 368 1,028

Other non-investment andnon-cash assets . . . . . 161 2,086 289 2,375 512 660 725 1,897 4,433 4,733

Investments of long-termbusiness and otheroperations:Investment properties . . 1,230 10,197 485 10,682 724 1,030 — 1,754 13,666 14,429Financial investments:

Loans (note v) . . . . . 184 599 163 762 43 — 256 299 1,245 1,128Equity securities and

portfolio holdings inunit trusts . . . . . . 6,946 40,756 352 41,108 107 12,659 9 12,775 60,829 60,246

Debt securities(note vi) . . . . . . . 4,595 20,383 13,075 33,458 13,173 5,751 203 19,127 57,180 53,461

Other investments(note vii) . . . . . . . 244 2,531 127 2,658 90 115 284 489 3,391 2,461

Deposits . . . . . . . . 466 4,021 313 4,334 828 1,418 182 2,428 7,228 6,812

Total investments . . . . . 13,665 78,487 14,515 93,002 14,965 20,973 934 36,872 143,539 138,537

Held for sale assets . . . . . 30 — — — — — — — 30 463Cash and cash equivalents . 127 642 56 698 49 836 159 1,044 1,869 1,979

Total assets . . . . . . . . 13,987 81,422 14,860 96,282 15,526 22,524 1,920 39,970 150,239 146,740

F-68

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

PAC with-profits sub-fund (note i) Other funds and subsidiaries

Scottish UK InsuranceAmicable Excluding Prudential Prudential operationsInsurance Prudential Annuities RetirementFund Annuities Limited Total Income Unit-linked Other 2007 2006

(note ii) Limited (note iii) (note iv) Limited business business Total Total Total

£ million £ million £ million £ million £ million £ million £ million £ million £ million £ millionEquity and liabilitiesEquityShareholders’ equity . . . . — — — — 1,125 194 45 1,364 1,364 1,263Minority interests . . . . . . 22 20 — 20 — — — — 42 79

Total equity . . . . . . . . . 22 20 — 20 1,125 194 45 1,364 1,406 1,342

LiabilitiesPolicyholder liabilities and

unallocated surplus ofwith-profits funds:Insurance contract

liabilities . . . . . . . . 12,927 34,988 12,564 47,552 13,402 8,766 151 22,319 82,798 80,323Investment contract

liabilities withdiscretionaryparticipation features . 693 28,773 — 28,773 — — — — 29,466 28,665

Investment contractliabilities withoutdiscretionaryparticipation features . — 14 — 14 — 12,059 — 12,059 12,073 11,453

Unallocated surplus ofwith-profits funds(reflecting applicationof ‘realistic’ provisionsfor UK regulatedwith-profits funds) . . — 12,486 1,719 14,205 — — — — 14,205 13,511

Total . . . . . . . . . . . . . 13,620 76,261 14,283 90,544 13,402 20,825 151 34,378 138,542 133,952

Operational borrowingsattributable toshareholder-financedoperations . . . . . . . . . — — — — — 12 — 12 12 11

Borrowings attributable towith-profits funds . . . . 112 875 — 875 — — — — 987 1,776

Other non-insuranceliabilities . . . . . . . . . . 233 4,266 577 4,843 999 1,493 1,724 4,216 9,292 9,659

Total liabilities . . . . . . . . 13,965 81,402 14,860 96,262 14,401 22,330 1,875 38,606 148,833 145,398

Total equity andliabilities . . . . . . . . . 13,987 81,422 14,860 96,282 15,526 22,524 1,920 39,970 150,239 146,740

Notes

(i) For the purposes of this table and subsequent explanation, references to the WPSF also include, for convenience, theamounts attaching to the Defined Charges Participating Sub-fund.

(ii) SAIF is a separate sub-fund within the PAC long-term business fund.

(iii) Wholly-owned subsidiary of the PAC WPSF that writes annuity business.

(iv) Excluding policyholder liabilities of the Hong Kong branch of PAC.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(v) The loans of the Group’s UK insurance operations of £1,245 million comprise mortgage loans of £449 million, policy loans of£35 million and other loans of £761 million. The mortgage loans are collateralised by properties. Other loans are allcommercial loans and comprise mainly syndicated loans held by the PAC with-profits fund.

(vi) Included in debt securities above are £3,511 million (2006: £3,341 million) of securities which are not quoted on activemarkets and are valued using valuation techniques of which £3,002 million (2006: £2,945 million) related to assets held bywith-profits operations and £509 million (2006: £396 million) related to assets held by shareholder-backed operations.

(vii) Other investments comprise:

2007

£millionDerivative assets (note G3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 571Partnerships in investment pools and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,820

3,391

Partnerships in investment pools and other comprise mainly investments held by the PAC with-profits fund. These investmentsare primarily venture fund investments and investment in property funds and limited partnerships.

(b) Information on credit risk of debt securities

The following table summarizes by rating the securities held by UK insurance operations as atDecember 31, 2007 and 2006:

UK insurancePAC with-profits sub-fund Other funds and subsidiaries operations

Scottish Excluding PrudentialAmicable Prudential Prudential RetirementInsurance Annuities Annuities Income Unit-linked Other 2007 2006

Fund Limited Limited Total Limited business business Total Total

£million £million £million £million £million £million £million £million £millionS&P—AAA . . . . . . . . . . 1,453 6,434 4,356 10,790 5,658 3,534 121 21,556 18,794S&P—AA+ to AA� . . . . 436 1,978 1,518 3,496 1,541 680 20 6,173 4,859S&P—A+ to A� . . . . . . 1,030 4,356 2,693 7,049 3,354 1,093 31 12,557 12,270S&P—BBB+ to BBB� . . . 652 2,780 920 3,700 781 267 9 5,409 5,792S&P—Other . . . . . . . . . 167 757 11 768 1 6 — 942 880

3,738 16,305 9,498 25,803 11,335 5,580 181 46,637 42,595

Moody’s—Aaa . . . . . . . . 138 550 177 727 125 22 9 1,021 1,073Moody’s—Aa1 to Aa3 . . . 23 198 273 471 82 9 2 587 479Moody’s—A1 to A3 . . . . 74 321 284 605 243 19 3 944 1,030Moody’s—Baa1 to Baa3 . . 41 180 150 330 103 14 2 490 627Moody’s—Other . . . . . . 10 400 — 400 — — — 410 127

286 1,649 884 2,533 553 64 16 3,452 3,336

Fitch . . . . . . . . . . . . . . 43 196 265 461 160 17 1 682 1,243Other . . . . . . . . . . . . . 528 2,233 2,428 4,661 1,125 90 5 6,409 6,287

Total debt securities . . . . 4,595 20,383 13,075 33,458 13,173 5,751 203 57,180 53,461

F-70

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

In the table above S&P ratings have been used where available. For securities where S&P ratings arenot available those produced by Moody’s and then Fitch have been used as an alternative.

Where no external ratings are available internal ratings produced by the Group’s asset managementoperations, which are prepared on the Company’s assessment of a comparable basis to external ratings,are used where possible. Of the total debt securities held at December 31, 2007 which are notexternally rated, £2,972 million were internally rated AAA to A�, £2,844 million were internally ratedBBB+ to B� and £593 million were unrated. The majority of unrated debt security investments wereheld in SAIF and the PAC with-profits fund and relate to convertible debt and other investments whichare not covered by ratings analysts nor have an internal rating attributed to them.

As detailed in note D2(h) below the primary sensitivity of IFRS basis profit or loss and shareholders’equity relates to non-linked shareholder-backed business which covers other funds and subsidiaries inthe table above.

(c) Products and guarantees

Prudential’s long-term products in the UK consist of life insurance, pension products and pensionannuities.

These products are written primarily in:

• One of three separate sub-funds of the PAC long-term fund, namely the with-profits sub-fund,the SAIF, and the non-profit sub-fund;

• Prudential Annuities Limited, which is owned by the PAC with-profits sub-fund;

• Prudential Retirement Income Limited, a shareholder-owned subsidiary; or

• Other shareholder-backed subsidiaries writing mainly non-profit unit-linked business.

(i) With-profits products and PAC with-profits sub-fund

Within the balance sheet of UK insurance operations at December 31, 2007, there are policyholderliabilities of £76.3 billion (2006: £74.1 billion) and unallocated surplus of £14.2 billion (2006:£13.5 billion) that relate to the WPSF. The WPSF mainly contains with-profits business but it alsocontains some non-profit business (unit-linked, term assurances and annuities). The WPSF’s profits areapportioned 90 per cent to its policyholders and 10 per cent to shareholders as surplus for distributionis determined via the annual actuarial valuation.

With-profits products provide returns to policyholders through bonuses that are ‘smoothed’. Thereare two types of bonuses: ‘annual’ and ‘final’. Annual bonuses are declared once a year, and oncecredited, are guaranteed in accordance with the terms of the particular product. Unlike annual bonuses,final bonuses are guaranteed only until the next bonus declaration.

F-71

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

When determining policy payouts, including final bonuses, Prudential considers policyholders’reasonable expectations, the need to smooth claim values and payments from year to year andcompetitive considerations, together with ‘asset shares’ for specimen policies. Asset shares broadlyreflect the value of premiums paid plus the investment return on the assets notionally attributed to thepolicy, less the other items to be charged such as expenses and the cost of the life insurance cover.

For many years, UK with-profits product providers, such as Prudential, have been required by lawand regulation to consider the reasonable expectations of policyholders in setting bonus levels. Thisconcept is established by statute but is not defined. However, it is defined within the regulatoryframework, which also more recently contains an explicit requirement to treat customers fairly.

The WPSF held a provision of £45 million at December 31, 2007 (2006: £47 million) to honorguarantees on a small amount of guaranteed annuity products. SAIF’s exposure to guaranteed annuitiesis described below.

Beyond the generic guarantees described above, there are very few explicit options or guaranteessuch as minimum investment returns, surrender values or annuities at retirement and any granted havegenerally been at very low levels.

(ii) Annuity business

Prudential’s conventional annuities include level, fixed increase and retail price index (RPI) annuities.They are mainly written within the subsidiaries PAL, PRIL, Prudential Pensions Limited and the PACwith-profits sub-fund, but there are some annuity liabilities in the non-profit sub-fund and SAIF.

Prudential’s fixed-increase annuities incorporate automatic increases in annuity payments by fixedamounts over the policyholder’s life. The RPI annuities that Prudential offers provide for a regularannuity payment to which an additional amount is added periodically based on the increase in the UKRPI.

Prudential’s with-profits annuities, which are written in the WPSF, combine the income features ofannuity products with the investment smoothing features of with-profits products and enablepolicyholders to obtain exposure to investment return on the WPSF’s equity shares, property and otherinvestment categories over time. Policyholders select an ‘anticipated bonus’ from the specific rangePrudential offers for the particular product. The amount of the annuity payment each year dependsupon the relationship between the anticipated bonus rate selected by the policyholder when the productis purchased and the bonus rates Prudential subsequently declares each year during the term of theproduct. If the total bonus rates fall below the anticipated rate, then the annuity income falls.

On December 31, 2007, Prudential completed the transfer of 62,000 with-profits annuity policiesfrom Equitable Life, with assets of approximately £1.7 billion. The policies transferred form part of theDefined Charge Participating Sub-Fund of Prudential’s with-profit fund. Profits to shareholders willemerge on a ‘charges less expenses’ basis and policyholders will be entitled to 100 per cent of theinvestment earnings.

At December 31, 2007, £29.5 billion (2006: £29.0 billion) of investments relate to annuity businessof PAL and PRIL. These investments are predominantly in debt securities (including retail price index-

F-72

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

linked bonds to match retail price index-linked annuities), loans and deposits and are duration matchedwith the estimated duration of the liabilities they support.

(iii) SAIF

SAIF is a ring-fenced sub-fund of the PAC long-term fund formed following the acquisition of themutually owned Scottish Amicable Life Assurance Society in 1997. No new business may be written inSAIF, although regular premiums are still being paid on policies in force at the time of the acquisitionand incremental premiums are permitted on these policies.

The fund is solely for the benefit of policyholders of SAIF. Shareholders have no interest in theprofits of this fund although they are entitled to asset management fees on this business.

The process for determining policyholder bonuses of SAIF with-profits policies, which constitute thevast majority of obligations of the funds, is similar to that for the with-profits policies of the WPSF.However, in addition, the surplus assets in SAIF are allocated to policies in an orderly and equitabledistribution over time as enhancements to policyholder benefits i.e. in excess of those based on assetshare.

Provision is made for the risks attaching to some SAIF unitized with-profits policies that haveMVR-free dates and for those SAIF products which have a guaranteed minimum benefit on death ormaturity of premiums accumulated at four per cent per annum.

The Group’s main exposure to guaranteed annuities in the UK is through SAIF and a provision of£563 million was held in SAIF at December 31, 2007 (2006: £561 million) to honor the guarantees. AsSAIF is a separate sub-fund solely for the benefit of policyholders of SAIF this provision has no impacton the financial position of the Group’s shareholders’ equity.

(iv) Unit-linked (non-annuity) and other non-profit business

Prudential UK insurance operations also have an extensive book of unit-linked policies of varyingtypes and provide a range of other non-profit business such as credit life and protection contracts.These contracts do not contain significant financial guarantees.

There are no guaranteed maturity values or guaranteed annuity options on unit-linked policiesexcept for minor amounts for certain policies linked to cash units within SAIF.

(d) Exposure to market risk

(i) Non-linked life and pension business

For with-profits business, the absence of guaranteed surrender values and the flexibility given bythe operation of the bonus system means that the majority of the investments backing the with-profitsbusiness are in equities and real estate with the balance in debt securities, deposits and loans.

The investments supporting the protection business are small in value and tend to be fixedmaturities reflecting the guaranteed nature of the liabilities.

F-73

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(ii) Pension annuity business

Prudential’s UK annuity business mainly employs fixed income investments (including UK retail priceindex-linked assets) because the liabilities consist of guaranteed payments for as long as each annuitantor surviving partner is alive. Retail price index-linked assets are used to back pension annuities wherethe payments are linked to the RPI.

(iii) Unit-linked business

Except through the second order effect on asset management fees, the unit-linked business of theUK insurance operations is not exposed to market risk. The lack of exposure arises from the contractnature whereby policyholder benefits reflect asset value movements of the unit-linked funds.

(e) Process for setting assumptions and determining contract liabilities

(i) Overview

The calculation of the contract liabilities involves the setting of assumptions for future experience.This is done following detailed review of the relevant experience including, in particular, mortality,expenses, tax, economic assumptions and where applicable, persistency.

For with-profits business written in the WPSF or SAIF, a market consistent valuation is performed(as described in section (ii) below). Additional assumptions required are for persistency and themanagement actions under which the fund is managed. Assumptions used for a market consistentvaluation typically do not contain margins, whereas those used for the valuation of other classes ofbusiness do.

Mortality assumptions are set based on the results of the most recent experience analysis looking atthe experience over recent years of the relevant business. For non-profit business, a margin for adversedeviation is added. Different assumptions are applied for different product groups. For annuitantmortality, assumptions for current mortality rates are based on recent experience investigations andexpected future improvements in mortality. The expected future improvements are based on recentexperience and projections of the business and industry experience generally.

Maintenance and, for some classes of business, termination expense assumptions are expressed asper policy amounts. They are set based on the expenses incurred during the year, including anallowance for ongoing investment expenditure and allocated between entities and product groups inaccordance with the operation’s internal cost allocation model. For non-profit business a margin foradverse deviation is added to this amount. Expense inflation assumptions are set consistent with theeconomic basis and based on the difference between yields on nominal gilts and index-linked gilts.

The actual renewal expenses charged to SAIF continued to be based on the tariff arrangementspecified in the Scottish Amicable Life Assurance Society Scheme up to December 31, 2007, when thetariff arrangement terminated. This provided an additional margin in SAIF as the unit costs derived fromactual expenses (and used to derive the recommended assumptions) were generally significantly greaterthan the tariff costs. From January 1, 2008 the full expenses incurred are being charged to SAIF.

F-74

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

The assumptions for asset management expenses are based on the charges specified in agreementswith the Group’s asset management operations, plus a margin for adverse deviation for non-profitbusiness.

Tax assumptions are set equal to current rates of taxation.

For non-profit business excluding unit-linked business, the valuation interest rates used to discountthe liabilities are based on the yields as at the valuation date on the assets backing the technicalprovisions. For fixed interest securities the gross redemption yield is used except for the PAL and PRILannuity business where the internal rate of return of the assets backing the liabilities is used. Forproperty it is the rental yield, and for equities it is the greater of the dividend yield and the average ofthe dividend yield and the earnings yield. An adjustment is made to the yield on non risk-free fixedinterest securities and property to reflect credit risk. To calculate the non-unit reserves for linkedbusiness, assumptions have been set for the gross unit growth rate and the rate of inflation ofmaintenance expenses, as well as for the valuation interest rate as described above.

(ii) WPSF and SAIF

The policyholder liabilities reported for the WPSF are primarily for two broad types of business.These are accumulating and conventional with-profits contracts. The policyholder liabilities of the WPSFare accounted for under FRS 27.

The provisions have been determined on a basis consistent with the detailed methodology includedin regulations contained in the FSA’s rules for the determination of reserves on the FSA’s ‘realistic’ Peak2 basis. In aggregate, the regime has the effect of placing a value on the liabilities of UK with-profitscontracts, which reflects the amounts expected to be paid based on the current value of investmentsheld by the with-profits funds and current circumstances. These contracts are a combination ofinsurance and investment contracts with discretionary participation features, as defined by IFRS 4.

The FSA’s Peak 2 calculation under the realistic regime requires the value of liabilities to becalculated as:

• The with-profits benefits reserve (WPBR); plus

• future policy related liabilities (FPRL); plus

• the realistic current liabilities of the fund.

The WPBR is primarily based on the retrospective calculation of accumulated asset shares but isadjusted to reflect future expected policyholder benefits and other outgoings. Asset shares arecalculated as the accumulation of all items of income and outgo that are relevant to each policy type.Income comprises credits for premiums, investment returns (including unrealized gains), andmiscellaneous profits. Outgo comprises charges for tax (including an allowance for tax on unrealizedgains), guarantees and smoothing, mortality and morbidity, shareholders’ profit transfers, miscellaneouslosses, and expenses and commission (net of any tax relief).

The FPRL must include a market consistent valuation of costs of guarantees, options and smoothing,less any related charges, and this amount must be determined using either a stochastic approach,hedging costs or a series of deterministic projections with attributed probabilities.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

The assumptions used in the stochastic models are calibrated to produce risk-free returns on eachasset class. Volatilities of, and correlations between, investment returns from different asset classes areas determined by the Group’s Portfolio Management Group and aim to be market consistent.

The cost of guarantees, options and smoothing is very sensitive to the bonus, market valuereduction (MVR), and investment policy employed and therefore the stochastic modeling incorporates arange of management actions that would help to protect the fund in adverse investment scenarios.Substantial flexibility has been included in the modeled management actions in order to reflect thediscretion that is retained in adverse investment conditions, thereby avoiding the creation ofunreasonable minimum capital requirements. The management actions assumed are consistent with theGroup’s management policy for with-profits funds and the Group’s disclosures in the publicly availablePrinciples and Practices of Financial Management.

The contract liabilities for with-profits business also require assumptions for persistency. These areset based on the results of recent experience analysis.

(iii) Annuity business

The contract liabilities for PAL and PRIL are based on the FSA regulatory solvency basis. Thevaluation is then modified for IFRS reporting purposes to remove some of the margins for prudencewithin the assumptions, and contingency reserves, which are required under the solvency basis appliedfor regulatory purposes, but not for financial accounting.

The contract liabilities are the discounted value of future claim payments, adjusted for investmentexpenses and future administration costs. The interest rates used for discounting claim payments arederived from the yields on the assets held with an allowance for default risk.

The mortality assumptions are set in light of recent population and internal experience. Theassumptions used are percentages of standard actuarial mortality tables with an allowance for futuremortality improvements. Where annuities have been sold on an enhanced basis to impaired lives anadditional age adjustment is made. The percentages of the standard table used are selected according tothe source of business. The range of percentages used is set out in the following tables:

F-76

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

PAL PRIL

2007 Males Females Males Females

In payment . . . . . 106%—126% 84%—117% 99%—114% 85%—103%PNMA00 PNFA00 PNMA00 PNFA00(C = 2000) with (C = 2000) with (C = 2000) with (C = 2000) withmedium cohort 75% of medium medium cohort 75% of mediumimprovement table cohort improvement table cohortwith a minimum improvement table with a minimum improvement tableannual with a minimum annual with a minimumimprovement of annual improvement of annual2.25% up to improvement of 2.25% up to improvement ofage 90, tapering 1.25% up to age 90, tapering 1.25% up toto zero at age 120 age 90, tapering to zero at age 120 age 90, tapering

to zero at age 120 to zero at age 120

In deferment . . . . AM92 minus AF92 minus AM92 minus AF92 minus4 years 4 years 4 years 4 years

PAL PRIL

2006 Males Females Males Females

In payment . . . . . 106%—126% 84%—117% 99%—114% 85%—103%PNMA00 PNFA00 PNMA00 PNFA00(C = 2000) with (C = 2000) with (C = 2000) with (C = 2000) withmedium cohort 75% of medium medium cohort 75% of mediumimprovement table cohort improvement table cohortwith a minimum improvement table with a minimum improvement tableannual with a minimum annual with a minimumimprovement of annual improvement of annual1.25% improvement of 1.25% improvement of

0.75% 0.75%

In deferment . . . . AM92 minus AF92 minus AM92 minus AF92 minus4 years 4 years 4 years 4 years

F-77

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

PAL PRIL

2005 Males Females Males Females

In payment . . . . . 93%—100% 84%—105% 88%—100% 84%—102%PMA92 PFA92 (C = 2004) PMA92 PFA92 (C = 2004)(C = 2004) with with 75% of (C = 2004) with with 75% ofmedium cohort medium cohort medium cohort medium cohortimprovement table improvement table improvement table improvement tablewith a minimum with a minimum with a minimum with a minimumannual annual annual annualimprovement of improvement of improvement of improvement of1.25% 0.75% 1.25% 0.75%

In deferment . . . . AM92 minus AF92 minus AM92 minus AF92 minus4 years 4 years 4 years 4 years

PAL PRIL

2004 Males Females Males Females

In payment . . . . . 97%—111% 92%—105% 90%—113% 85%—104%PMA92 PFA92 (C = 2004) PMA92 PFA92 (C = 2004)(C = 2004) with with 75% of (C = 2004) with with 75% ofmedium cohort medium cohort medium cohort medium cohortimprovement table improvement table improvement table improvement tablewith a minimum with a minimum with a minimum with a minimumannual annual annual annualimprovement of improvement of improvement of improvement of1.25% 0.75% 1.25% 0.75%

In deferment . . . . AM92 minus AF92 minus AM92 minus AF92 minus4 years 4 years 4 years 4 years

(iv) Unit-linked (non-annuity) and other non-profit business

The majority of other long-term business written in the UK insurance operations is unit-linkedbusiness or other business with similar features. For these contracts the attaching liability reflects theunit value obligation and provision for expenses and mortality risk. The latter component is determinedby applying mortality assumptions on a basis that is appropriate for the policyholder profile.

For unit-linked business, the assets covering unit liabilities are exposed to market risk, but theresidual risk when considering the unit-linked liabilities and assets together is limited to the effect onfund-based charges.

For those contracts where the level of insurance risk is insignificant the assets and liabilities arisingunder the contracts are distinguished between those that relate to the financial instrument liability andacquisition costs and deferred income that relate to the component of the contract that relates toinvestment management. Acquisition costs and deferred income are recognized consistent with the levelof service provision in line with the requirements of IAS 18.

F-78

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(f) Reinsurance

The Group’s UK insurance business cedes only minor amounts of business outside the Group.During 2007, reinsurance premiums for externally ceded business were £59 million (2006: £58 million;2005: £82 million) and reinsurance recoverable insurance assets were £335 million (2006: £510 million)in aggregate. The gains and losses recognized in profit and loss for these contracts were immaterial.

(g) Effect of changes in assumptions used to measure insurance assets and liabilities

2007

For UK insurance operations, the 2007 results have been determined after making changes tomortality assumptions for the annuity business and other assumptions for the WPSF and releasing excessmargins in the aggregate liabilities that had previously been set aside as an indirect extra allowance forlongevity related risks.

2007

With-profits Shareholder-backedsub-fund business

£ million £ million

Effect of strengthening of mortality assumptions (note a) . . . . . . . . . . (435) (276)Modeling of management actions (note b) . . . . . . . . . . . . . . . . . . . (167) —Strengthening of other assumptions (note c) . . . . . . . . . . . . . . . . . . (62) —

(664) (276)Release of other margins:

Projected benefit related (note d) . . . . . . . . . . . . . . . . . . . . . . . 13 104Investment related (note e)

Default margins . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 48Asset management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 —

259 48Expenses related (notes c,f) . . . . . . . . . . . . . . . . . . . . . . . . . . . — 68Other (notes c,g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 90

272 310

Net charge to unallocated surplus . . . . . . . . . . . . . . . . . . . . . . . . . (392)

Net credit to shareholder result . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Notes

(a) The mortality assumptions have been strengthened by increasing the minimum level of future improvement rate.

(b) Given the continuing strong financial position of the fund, the assumed management actions relating to with-profits businesshave been revised in order to better reflect the benefits to policyholders that can be supported by the fund.

(c) The effects of the strengthening of other assumptions for the WPSF of £62 million is net of a release of PAL’s expensereserve of £11 million and other additional margins in PAL’s liabilities of £40 million.

F-79

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(d) The release of projected benefit related margins primarily relates to modeling improvements that have been made during2007.

(e) The release of investment-related margins includes £48 million in respect of default margins for shareholder-backed businessand £199 million for PAL. The resulting assumptions for expected defaults, after allowing for the release of margins, remainappropriate given economic conditions at December 31, 2007. In addition, for PAL, there is a release of £60 million in respectof asset management fees.

(f) A release of expense reserves has been made following recent expense reductions.

(g) This amount reflects the release of other additional margins in the liabilities that are no longer appropriate in light of theexplicit strengthening of the mortality assumptions.

2006

For with-profits business, there was no significant change in assumptions in 2006.

There was no change in mortality assumptions for PAL in 2006 which had a material effect on themeasurement of the insurance liabilities. Liabilities for PAL were increased by £47 million for the effectof change of assumptions for renewal expenses. As PAL is owned by the WPSF, this change had noeffect on shareholder profit.

In 2006, the FSA made regulatory changes for UK regulated shareholder-backed non-participatingbusiness. These changes were confirmed in the December 2006 policy statement PS06/14.

The changes to the FSA rules allow insurance liabilities for this business to incorporate morerealism. In particular this is achieved by:

• setting technical provisions for expenses not directly attributable to one particular contract at ahomogenous risk group level and not, as previously, at an individual contract level for allnon-profit business; and

• recognizing the economic effect of making a prudent lapse rate assumption. Previously, no lapseswere assumed.

Under IFRS 4, the effect of this change is accounted for as a change in estimate and there was aconsequent increase in profit before tax of £46 million.

In addition to the £46 million credit described above, a charge of £4 million was recognized in 2006for the effect of change of assumption for renewal and termination expenses mainly in respect of PAC.

2005

For with-profits business the only significant change for 2005 was an altered basis of recognizingliabilities and unallocated surplus for SAIF. This was to comply with actuarial guidance GN 45, whichrequires that for a closed fund where the fund will be distributed fully that the working capital is shownas zero, with the future enhancements to asset shares being increased by the free capital. Without theadjustment the unallocated surplus would have been approximately £700 million. Shareholder resultsand equity were not altered by this change.

The change of mortality table for PAL explained in section D2(e) increased liabilities by£144 million. As PAL is owned by the WPSF this change had no effect on shareholder profit.

F-80

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

For shareholder-backed non-participating business a number of changes of assumptions were madein 2005. Taken together these changes had the effect of reducing profit before tax by £36 million withconsequent increase in liabilities. The reduction arose from a charge of £69 million for strengthenedmortality assumptions, being partially offset by a net credit of £29 million in respect of a reduced levelof expected defaults for debt securities, and a credit of £4 million for other changes.

The net charge of £36 million comprised amounts in respect of PAC (£35 million charge), PrudentialHolborn Life (£2 million credit) and PRIL (£3 million charge).

(h) Sensitivity of IFRS basis profit or loss and equity to market and other risks

The risks to which the IFRS basis results of the UK insurance operations are sensitive areasset/liability matching, mortality experience and payment assumptions for shareholder-backed annuitybusiness. Further details are described below.

(i) With-profits business

SAIF

Shareholders have no interest in the profits of SAIF but are entitled to the asset management feespaid on the assets of the fund.

With-profits sub-fund business

For with-profits business (including non-participating business of PAL which is owned by the WPSF)adjustments to liabilities and any related tax effects are recognized in the income statement. However,except for any impact on the annual declaration of bonuses, shareholders’ profit for with-profits businessis unaffected. This is because IFRS basis profits for with-profits business, which are determined on thesame basis as on preceding UK GAAP, solely reflect one-ninth of the cost of bonuses declared for theyear.

The main factors that influence the determination of bonus rates are the return on the investmentsof the fund, the effect of inflation, taxation, the expenses of the fund chargeable to policyholders andthe degree to which investment returns are smoothed. Mortality and other insurance risk are relativelyminor factors.

Unallocated surplus represents the excess of assets over policyholder liabilities of the fund. Asunallocated surplus of the WPSF is recorded as a liability, movements in its value do not affectshareholders’ profits or equity.

The level of unallocated surplus is particularly sensitive to the level of investment returns on theportion of the life fund assets that represents the surplus. The effects for 2007 and 2006 aredemonstrated in note D5.

F-81

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(ii) Shareholder-backed annuity business

Profits from shareholder-backed annuity business are most sensitive to:

• the extent to which the duration of the assets held closely matches the expected duration of theliabilities under the contracts. Assuming close matching, the impact of short-term asset valuemovements as a result of interest rate movements will broadly offset changes in the value ofliabilities caused by movements in valuation rates of interest;

• actual versus expected default rates on assets held;

• the difference between long-term rates of return on corporate bonds and risk-free rates;

• the variance between actual and expected mortality experience;

• the extent to which expected future mortality experience gives rise to changes in themeasurement of liabilities; and

• changes in renewal expense levels.

A decrease in assumed mortality rates of one per cent would decrease gross profits byapproximately £35 million (2006: £34 million). A decrease in credit default assumptions of five basispoints would increase gross profits by £72 million (2006: £64 million). A decrease in renewal expenses(excluding asset management expenses) of five per cent would increase gross profits by £13 million(2006: £14 million). The effect on profits would be approximately symmetrical for changes inassumptions that are directionally opposite to those explained above.

(iii) Unit-linked and other business

Unit-linked and other business represents a comparatively small proportion of the in-force businessof the UK insurance operations.

Profits from unit-linked and similar contracts primarily arise from the excess of charges topolicyholders, for management of assets under the Company’s stewardship, over expenses incurred. Theformer is most sensitive to the net accretion of funds under management as a function of new businessand lapse and mortality experience. The accounting impact of the latter is dependent upon theamortization of acquisition costs in line with the emergence of margins (for insurance contracts) andamortization in line with service provision (for the investment management component of investmentcontracts). By virtue of the design features of most of the contracts which provide low levels ofmortality cover, the profits are relatively insensitive to changes in mortality experience.

(iv) Shareholder exposure to interest rate risk and other market risk

By virtue of the fund structure, product features and basis of accounting described in note D2(c)and (e), the policyholder liabilities of the UK insurance operations are, except for pension annuitybusiness, not generally exposed to interest rate risk. For pension annuity business, liabilities are exposedto fair value interest rate risk. However, the net exposure to the PAC WPSF (for PAL) and shareholders(for liabilities of PRIL and the non-profit sub-fund) is very substantially ameliorated by virtue of the closematching of assets with appropriate duration.

F-82

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

The close matching by the Group of assets of appropriate duration to annuity liabilities is based onmaintaining economic and regulatory capital. The measurement of liabilities under capital reportingrequirements and IFRS is not the same as detailed in note D2(e)(iii), with contingency reserves andsome other margins for prudence within the assumptions required under the FSA regulatory solvencybasis not included for IFRS reporting purposes. As a result IFRS equity is higher than regulatory capitaland therefore more sensitive to interest rate risk.

The estimated sensitivity of the UK non-linked shareholder backed business (principally pensionannuities business) to a movement in interest rates of one per cent as at December 31, 2007 and 2006is as follows:

2007 2006

Fall of 1% Rise of 1% Fall of 1% Rise of 1%

£ million £ million £ million £ million

Carrying value of debt securities and derivatives . . . . . . 1,930 (1,634) 1,802 (1,529)Policyholder liabilities . . . . . . . . . . . . . . . . . . . . . . . . (1,777) 1,467 (1,671) 1,374Related deferred tax effects . . . . . . . . . . . . . . . . . . . (43) 47 (40) 47

Net sensitivity of profit after tax and equity . . . . . . . . . 110 (120) 91 (108)

In addition the shareholder backed portfolio of UK non-linked insurance operations coveringliabilities and shareholders’ equity includes equity securities and investment property. Excluding anysecond order effects on the measurement of the liabilities for future cash flow to the policyholder, a10 per cent fall in their value would have given rise to a £86 million and £42 million reduction in pre-taxprofit for 2007 and 2006. After related deferred tax there would have been a £62 million and£29 million reduction in shareholders’ equity at December 31, 2007 and 2006 respectively.

The market risk sensitivities shown above reflect the impact of temporary market movements and,therefore, the primary effect of such movements would, in the Company’s supplementary analysis ofprofits be included within the short-term fluctuations in investment returns.

(i) Duration of liabilities

With the exception of most unitized with-profits bonds and other whole of life contracts themajority of the contracts of the UK insurance operations have a contract term. However, in effect, thematurity term of contracts reflects the earlier of death, maturity, or lapsation. In addition, with-profitcontract liabilities as noted in note D2(e) above include projected future bonuses based on currentinvestment values. The actual amounts payable will vary with future investment performance of SAIF andthe WPSF.

The tables below show the carrying value of the policyholder liabilities. Separately, the Group usescash flow projections of expected benefit payments as part of the determination of the value of in-forcebusiness when preparing EEV basis results. The tables below also show the maturity profile of the cash

F-83

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

flows used for 2007 and 2006 for that purpose for insurance contracts, as defined by IFRS, i.e. thosecontaining significant insurance risk, and investment contracts, which do not.

Annuity businessWith-profits business (Insurance contracts) Other

Insurance Investment Insurance Investment2007 contracts contracts Total PAL PRIL Total contracts contracts Total

£ million £ million £ million £ million £ million £ million £ million £ million £ million

Policyholderliabilities . . . . . . 47,915 29,480 77,395 12,564 13,402 25,966 8,917 12,059 20,976

% % % % % % % % %

Expected maturity:0 to 5 years . . . . . . 47 25 38 32 31 32 32 31 315 to 10 years . . . . . 27 23 26 24 23 24 23 22 2310 to 15 years . . . . 13 19 16 18 17 17 18 20 1915 to 20 years . . . . 7 15 10 12 12 12 12 13 1220 to 25 years . . . . 4 11 6 7 8 7 8 6 7Over 25 years . . . . . 2 7 4 7 9 8 7 8 8

Annuity businessWith-profits business (Insurance contracts) Other

Insurance Investment Insurance Investment2006 contracts contracts Total PAL PRIL Total contracts contracts Total

£ million £ million £ million £ million £ million £ million £ million £ million £ million

Policyholderliabilities . . . . . . 46,223 28,677 74,900 13,379 12,327 25,706 8,394 11,441 19,835

% % % % % % % % %

Expected maturity:0 to 5 years . . . . . . 47 23 36 32 30 31 32 37 345 to 10 years . . . . . 28 22 26 24 23 24 24 23 2310 to 15 years . . . . 13 17 15 18 17 18 18 14 1615 to 20 years . . . . 6 15 10 12 12 12 12 13 1320 to 25 years . . . . 3 13 7 7 8 7 7 5 7Over 25 years . . . . . 3 10 6 7 10 8 7 8 7

Notes

(i) The cash flow projections of expected benefit payments used in the maturity profile table above are from value of in-forcebusiness and exclude the value of future new business, including vesting of internal pension contracts.

(ii) Benefit payments do not reflect the pattern of bonuses and shareholder transfers in respect of the with-profits business.

(iii) Investment contracts under Other comprise certain unit-linked and similar contracts accounted for under IAS 39 and IAS 18.

(iv) For business with no maturity term included within the contracts, for example with-profits investment bonds such as PrudenceBond, an assumption is made as to likely duration based on prior experience.

(v) The maturity tables shown above have been prepared on a discounted basis. Details of undiscounted cash flow for investmentcontracts are shown in note G2.

F-84

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

D3: US insurance operations

(a) Summary results and balance sheet

(i) Results and movements on shareholders’ equity2007 2006 2005

£ million £ million £ million

Profit before shareholder tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 451 526Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (126) (150) (176)

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 301 350

2007 2006 2005

£ million £ million £ million

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 301 350Items recognized directly in equity:Exchange movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42) (377) 321

Unrealized valuation movements on securities classified asavailable-for-sale:Unrealized holding losses arising during the year . . . . . . . . . . . . . (231) (208) (772)Less losses included in the income statement . . . . . . . . . . . . . . . . (13) 7 22

(244) (201) (750)Related change in amortization of deferred income and acquisition

costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 75 307Related tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 50 152

Total items of income and expense recognized directly in equity . . . . . . (144) (453) 30

Total income and expense for the year . . . . . . . . . . . . . . . . . . . . . . . 156 (152) 380Cumulative effect of changes in accounting policies on adoption of

IAS 32, IAS 39 and IFRS 4, net of applicable taxes at 1 January 2005 . — — 273

Transfers to Central companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . (122) (91) (49)

Net increase (decrease) in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (243) 604Shareholders’ equity at beginning of year . . . . . . . . . . . . . . . . . . . . . 2,656 2,899 2,295

Shareholders’ equity at end of year . . . . . . . . . . . . . . . . . . . . . . 2,690 2,656 2,899

In addition, for Jackson, included within the movements in shareholders’ equity is a net reduction invalue of Jackson’s debt securities classified as ‘available-for-sale’ under IAS 39 of £244 million for 2007.This reduction reflects the effects of widened credit spreads in the US bond market partially offset bythe effect of reduced US interest rates and a steepening yield curve. These movements do not reflectdefaults or permanent impairments.

With the exception of debt securities for US insurance operations classified as ‘available-for-sale’under IAS 39, unrealized value movements on the Group’s investments are booked within the incomestatement. For with-profits operations such value movements are reflected in changes to asset share

F-85

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

liabilities to policyholders and the liability for unallocated surplus. For shareholder-backed operations theunrealized value movements form part of the total return for the year booked in the profit before taxattributable to shareholders.

However, for debt securities classified as ‘available-for-sale’, unless impaired, fair value movementsare recorded as a movement in shareholder reserves direct to equity.

In general, the debt securities of the Group’s US insurance operations are purchased with theintention and the ability to hold them for the longer term. In 2007, there was a movement in thebalance sheet value for these debt securities classified as available-for-sale from a net unrealized gain of£110 million to a net unrealized loss of £136 million. During 2007, US interest rates fell and the yieldcurve steepened. Offsetting this movement were market price effects resulting from increasing creditspreads and global credit concerns. As a result of these factors, the gross unrealized gain in the balancesheet decreased from £366 million at December 31, 2006 to £303 million at December 31, 2007 whilethe gross unrealized loss increased from £256 million at December 31, 2006 to £439 million atDecember 31, 2007. Details of the securities in an unrealized position are shown in D3(b) below.

These features are included in the table shown below of the movements in the values ofavailable-for-sale securities:

Change inunrealized

2007 appreciation 2006

£ million £ million £ million

Assets fair valued at below book valueBook value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,730 11,258Unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (439) (183) (256)

Fair value (as included in balance sheet) . . . . . . . . . . . . . . . . . . 10,291 11,002

Assets fair valued at or above book valueBook value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,041 8,208Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 (63) 366

Fair value (as included in balance sheet) . . . . . . . . . . . . . . . . . . 8,344 8,574

TotalBook value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,771 19,466Net unrealized (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . (136) (246) 110

Fair value (as included in balance sheet)* . . . . . . . . . . . . . . . . . 18,635 19,576

£ million

Reflected as part of movement in shareholders’ equityMovement in unrealized appreciation . . . . . . . . . . . . . . . . . . . . (244)Exchange movements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)

(246)

* Debt securities for US operations as included in the balance sheet of £19,002 million comprise £18,635 million in respect ofsecurities classified as ‘available-for-sale’ and £367 million for securities of consolidated investment funds classified as ‘fairvalue through profit and loss’.

F-86

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Included within the movement in unrealized losses for the debt securities of Jackson of £244 millionas shown above was a value reduction of £55 million relating to the sub-prime and Alt-A securities asreferred to in section G2.

(ii) Balance sheet

Variableannuityseparate Fixed US insuranceaccount annuity, GIC operationsassets and and otherliabilities business 2007 2006(note i) (note i) Total Total

£ million £ million £ million £ million

AssetsIntangible assets attributable to shareholders:

Deferred acquisition costs and other intangible assets . — 1,928 1,928 1,712

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,928 1,928 1,712

Other non-investment and non-cash assets . . . . . . . . . . — 1,651 1,651 1,588Investments of long-term business and other operations:

Investment properties . . . . . . . . . . . . . . . . . . . . . . — 8 8 20Financial investments:

Loans (note ii) . . . . . . . . . . . . . . . . . . . . . . . . . . — 3,258 3,258 3,254Equity securities and portfolio holdings in unit trusts . 15,027 480 15,507 11,710Debt securities (note D3b) . . . . . . . . . . . . . . . . . . — 19,002 19,002 20,146Other investments (note iii) . . . . . . . . . . . . . . . . . — 762 762 542Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 258 258 457

Total investments . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 23,768 38,795 36,129

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . — 169 169 99

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 27,516 42,543 39,528

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December 31, 2007

D: Life assurance business (Continued)

Variableannuityseparate Fixed US insuranceaccount annuity, GIC operationsassets and and otherliabilities business 2007 2006(note i) (note i) Total Total

£ million £ million £ million £ million

Equity and liabilitiesEquityShareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . — 2,690 2,690 2,656Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 1 1

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,691 2,691 2,657

LiabilitiesPolicyholder liabilities (note iv):

Insurance contract liabilities . . . . . . . . . . . . . . . . . . 15,027 17,899 32,926 30,184Investment contract liabilities without discretionary

participation features (GIC and annuity certain) . . . . — 1,922 1,922 1,562

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 19,821 34,848 31,746

Core structural borrowings of shareholder-financedoperations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 125 125 127

Operational borrowings attributable to shareholder-financed operations . . . . . . . . . . . . . . . . . . . . . . . . — 591 591 743

Other non-insurance liabilities . . . . . . . . . . . . . . . . . . . — 4,288 4,288 4,255

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 24,825 39,852 36,871

Total equity and liabilities . . . . . . . . . . . . . . . . . . . 15,027 27,516 42,543 39,528

Notes

(i) Assets and liabilities attaching to variable annuity business that are not held in the separate account are shown within otherbusiness.

(ii) LoansThe loans of Jackson of £3,258 million comprise mortgage loans of £2,841 million and policy loans of £417 million. All of themortgage loans are commercial mortgage loans which are collateralized by properties. The property types are mainlyindustrial, multi-family residential, suburban office, retail and hotel.

Jackson’s mortgage loan portfolio does not include any single-family residential mortgage loans and is therefore not exposedto the risk of defaults associated with residential sub-prime mortgage loans.

The policy loans are fully secured by individual life insurance policies or annuity policies.

These loans are accounted for at amortized cost, less any impairment.

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December 31, 2007

D: Life assurance business (Continued)

(iii) Other investments comprise:

2007

£ millionDerivative assets (note G3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390Partnerships in investment pools and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372

762

Partnerships in investment pools and other comprise primarily investments in limited partnerships. These include interest inthe PPM America Private Equity Fund and diversified investments in 164 other partnerships by independent money managersthat generally invest in various equities and fixed income loans and securities.

(iv) Summary policyholder liabilities (net of reinsurance) and reserves at December 31, 2007. The policyholder liabilities, net ofreinsurers’ share of £436 million (2006: £427 million), reflect balances in respect of the following:

2007 2006

£ million £ millionPolicy reserves and liabilities on non-linked business:Reserves for future policyholder benefits and claims payable . . . . . . . . . . . . . . . . . . . . . . . 916 935Deposits on investment contracts (as defined under US GAAP) . . . . . . . . . . . . . . . . . . . . . 16,784 17,690Guaranteed investment contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,685 1,327Unit-linked (variable annuity) business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,027 11,367

34,412 31,319

In addition to the policyholder liabilities above, Jackson has entered into a programme of funding arrangements undercontracts which, in substance, are almost identical to GICs. The liabilities under these funding arrangements totaled£2,607 million (2006: £2,552 million) and are included in ‘other non-insurance liabilities’ in the balance sheet above.

(b) Information on credit risks of debt securities

2007 2006Carrying Carrying

Summary value value

£ million £ million

Corporate security and commercial loans:Publicly traded and SEC Rule 144A traded . . . . . . . . . . . . . . . . . . . . . . . . . . 10,345 11,569Non-SEC Rule 144A traded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613 2,458

12,958 14,027Residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,939 2,827Commercial mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,532 1,155Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,573 2,137

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,002 20,146

Credit quality

For statutory reporting in the US, debt securities are classified into six quality categories specifiedby the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC). The

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December 31, 2007

D: Life assurance business (Continued)

categories range from Class 1 (the highest) to Class 6 (the lowest). Performing securities are designatedas Classes 1 to 5. Securities in or near default are designated Class 6. Securities designated as Class 3,4, 5 and 6 are non-investment grade securities. Generally, securities rated AAA to A by nationallyrecognized statistical ratings organizations are reflected in Class 1, BBB in Class 2, BB in Class 3 and Band below in Classes 4 to 6. If a designation is not currently available from the NAIC, Jackson’sinvestment adviser, PPM America, provides the designation for the purposes of disclosure below.

The following table shows the quality of publicly traded and SEC Rule 144A traded debt securitiesheld by the US operations as at December 31, 2007 and 2006 by NAIC classifications:

2007 Carrying value 2006 Carrying value

£ million % of total £ million % of total

NAIC designation:1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,338 42 4,631 402 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,194 50 5,850 513 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 542 5 817 74 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 2 249 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1 22 0

10,345 100 11,569 100

The following table shows the quality of the non-SEC Rule 144A traded private placement portfolioby NAIC classifications:

2007 Carrying value 2006 Carrying value

£ million % of total £ million % of total

NAIC designation:1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011 39 861 352 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,351 52 1,345 543 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 8 212 94 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 1 40 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —

2,613 100 2,458 100

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December 31, 2007

D: Life assurance business (Continued)

The following table shows the quality of residential and commercial mortgage-backed securities:

2007 2006Carrying Carrying

value value

£ million £ million(unless (unless

otherwise otherwisestated) stated)

Residential mortgage-backed securities (included within debt securities)Total residential mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . 2,939 2,827Residential mortgage-backed securities rated AAA or equivalent by a nationally

recognized statistical ratings organisation (including Standard & Poor’s, Moody’sand Fitch):Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,542 1,750Percentage of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86.5% 61.9%

Residential mortgage-backed securities rated NAIC 1:Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,932 2,824Percentage of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99.8% 99.9%

Commercial mortgage-backed securities (included within debt securities)Total commercial mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . 1,532 1,155Commercial mortgage-backed securities rated AAA or equivalent by a nationally

recognized statistical ratings organisation (including Standard & Poor’s, Moody’sand Fitch):Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,351 1,090Percentage of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88.2% 94.4%

Commercial mortgage-backed securities rated NAIC 1:Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,462 1,076Percentage of total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95.4% 93.2%

Included within other debt securities of £1,573 million in the summary shown above are£944 million (2006: £1,133 million) of asset backed securities held directly by Jackson, of which£817 million (2006: £791 million) were NAIC designation 1 and £127 million (2006: £342 million) NAICdesignation 2. In addition, other debt securities includes £316 million (2006: £405 million) in respect ofsecurities held by the Piedmont trust entity (see note G1) and £313 million (2006: £485 million) fromthe consolidation of investment funds managed by PPM America.

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D: Life assurance business (Continued)

In addition to the ratings disclosed above, the following table summarizes by rating the debtsecurities held by US insurance operations as at December 31, 2007 using Standard and Poor’s (S&P),Moody’s and Fitch ratings:

2007Carrying

value

£ million

S&P—AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,896S&P—AA+ to AA– . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,187S&P—A+ to A– . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,657S&P—BBB+ to BBB– . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,415S&P—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,113

15,268

Moody’s—Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 549Moody’s—Aa1 to Aa3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Moody’s—A1 to A3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47Moody’s—Baa1 to Baa3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Moody’s—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

871

Fitch . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,483

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,002

In the table above, S&P ratings have been used where available. For securities where S&P ratingsare not immediately available, those produced by Moody’s and then Fitch have been used as analternative.

The amounts within Other which are not rated by S&P, Moody’s or Fitch have the following NAICclassifications:

2007

£ million

NAIC 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,079NAIC 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,311NAIC 3-6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

2,483

Included in debt securities are £2,863 million (2006: £2,859 million) of securities which are notquoted on active markets and are valued using valuation techniques.

Debt securities above are shown net of cumulative impairment losses on retained securities of£246 million (2006: £266 million).

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December 31, 2007

D: Life assurance business (Continued)

Included within the debt securities of Jackson at December 31, 2007 are exposures to sub-primeand Alt-A mortgages and CDO funds as follows:

2007Carrying

value

£ million

Sub-prime mortgages (S&P rated AAA*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237Alt-A mortgages (77% AAA, 17% AA*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660

897CDO funds** . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260

1,157

* The ratings shown apply to the debt securities of Jackson and not the underlying collateral.

** Including Group’s economic interest in Piedmont (as described in note G1) and other consolidated CDO portfolios.

Jackson defines its exposure to sub-prime mortgages as investments in residential mortgage-backedsecurities in which the underlying borrowers have a US Fair Isaac Credit Organization (FICO) credit scoreof 659 or lower.

Debt securities classified as available-for-sale in an unrealized loss position

The unrealized losses in the US insurance operations balance sheet on unimpaired securities are(£439) million (2006: £(256) million). This reflects assets with fair market value and book value of£10,291 million and £10,730 million respectively.

The following table shows some key attributes of the debt securities that are in an unrealized lossposition at December 31, 2007 and 2006.

2007 2006

Unrealized UnrealizedFair value of securities as a percentage of book value Fair value loss Fair value loss

£ million £ million £ million £ million

Between 90% and 100% . . . . . . . . . . . . . . . . . . . . . . 9,370 (274) 10,941 (248)Between 80% and 90% . . . . . . . . . . . . . . . . . . . . . . . 784 (122) 61 (8)Below 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 (43) — —

10,291 (439) 11,002 (256)

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D: Life assurance business (Continued)

Included within the table above are amounts relating to sub-prime and Alt-A securities of:

Fair value of securities as a percentage of book value Fair value Unrealized loss

£ million £ million

Between 90% and 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572 (24)Between 80% and 90% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 (22)Below 80% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (10)

732 (56)

2007 2006

Aged analysis of Non- Non-unrealized losses for the Not investment Investment Not investment Investmentperiods indicated rated grade grade Total rated grade grade Total

£ million £ million £ million £ million £ million £ million £ million £ million

Less than 6 months . . . (7) (8) (52) (67) (1) (1) (14) (16)6 months to 1 year . . . (10) (21) (105) (136) (3) (1) (10) (14)1 year to 2 years . . . . (5) (2) (16) (23) (24) (10) (135) (169)2 years to 3 years . . . . (24) (10) (140) (174) (5) — (9) (14)3 years to 4 years . . . . (3) (1) (5) (9) (5) — (35) (40)4 years to 5 years . . . . (3) — (24) (27) — — — —5 years to 6 years . . . . — — — — (2) (1) — (3)6 years to 7 years . . . . (1) (2) — (3) — — — —

(53) (44) (342) (439) (40) (13) (203) (256)

At December 31, 2007, the gross unrealized losses in the balance sheet for the sub-prime and Alt-Asecurities in an unrealized loss position were £56 million. Sub-prime and Alt-A securities with unrealizedlosses of £37 million in the balance sheet at December 31, 2007 have been in an unrealized lossposition for less than one year with the remaining securities with unrealized losses of £19 million beingin an unrealized loss position for more than one year.

2007 2006Unrealized Unrealized

By maturity of security loss loss

£ million £ million

Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (1)1 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (29)5 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (164) (113)More than 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60) (51)Mortgage-backed securities and other debt securities . . . . . . . . . . . . . . . . . . (160) (62)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (439) (256)

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December 31, 2007

D: Life assurance business (Continued)

(c) Products and guarantees

Jackson provides long-term savings and retirement products to retail and institutional customersthroughout the US. Jackson offers fixed annuities (interest-sensitive, fixed indexed and immediateannuities), variable annuities (VA), life insurance and institutional products.

(i) Fixed annuities

Interest-sensitive annuities

At December 31, 2007, interest-sensitive fixed annuities accounted for 25 per cent (2006: 31 percent) of policy and contract liabilities of Jackson. Interest-sensitive fixed annuities are primarily deferredannuity products that are used for retirement planning and for providing income in retirement. Theypermit tax-deferred accumulation of funds and flexible payout options.

The policyholder of an interest-sensitive fixed annuity pays Jackson a premium, which is credited tothe policyholder’s account. Periodically, interest is credited to the policyholder’s account and in somecases administrative charges are deducted from the policyholder’s account. Jackson makes benefitpayments at a future date as specified in the policy based on the value of the policyholder’s account atthat date.

The policy provides that at Jackson’s discretion it may reset the interest rate, subject to aguaranteed minimum. The minimum guarantee varies from 1.5 per cent to 5.5 per cent (2006: 1.5 percent to 5.5 per cent) depending on the jurisdiction of issue and the date of issue, with 80 per cent(2006: 80 per cent) of the fund at three per cent or less. The average guarantee rate is 3.1 per cent(2006: 3.1 per cent).

Approximately 30 per cent (2006: 35 per cent) of the interest-sensitive fixed annuities Jacksonwrote in 2007 provide for a market value adjustment, that could be positive or negative, on surrendersin the surrender period of the policy. This formula-based adjustment approximates the change in valuethat assets supporting the product would realize as interest rates move up or down. The minimumguaranteed rate is not affected by this adjustment.

Fixed indexed annuities

Fixed indexed annuities accounted for seven per cent (2006: seven per cent) of Jackson’s policyand contract liabilities at December 31, 2007. Fixed indexed annuities vary in structure, but generallyare deferred annuities that enable policyholders to obtain a portion of an equity-linked return (based onparticipation rates and caps) but provide a guaranteed minimum return. These guaranteed minimumrates are generally set at three per cent.

Jackson hedges the equity return risk on fixed indexed products using futures and options linked tothe relevant index. The cost of these hedges is taken into account in setting the index participation ratesor caps. Jackson bears the investment and surrender risk on these products.

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December 31, 2007

D: Life assurance business (Continued)

Immediate annuities

At December 31, 2007, immediate annuities accounted for two per cent (2006: two per cent) ofJackson’s policy and contract liabilities. Immediate annuities guarantee a series of payments beginningwithin a year of purchase and continuing over either a fixed period of years and/or the life of thepolicyholder. If the term is for the life of the policyholder, then Jackson’s primary risk is mortality risk.The implicit interest rate on these products is based on the market conditions that exist at the time thepolicy is issued and is guaranteed for the term of the annuity.

(ii) Variable annuities

At December 31, 2007, VAs accounted for 45 per cent (2006: 38 per cent) of Jackson’s policy andcontract liabilities. VAs are deferred annuities that have the same tax advantages and payout options asinterest-sensitive and fixed indexed annuities.

The primary differences between VAs and interest-sensitive or fixed indexed annuities areinvestment risk and return. If a policyholder chooses a VA, the rate of return depends upon theperformance of the selected fund portfolio. Policyholders may allocate their investment to either thefixed or variable account. Investment risk on the variable account is borne by the policyholder, whileinvestment risk on the fixed account is borne by Jackson through guaranteed minimum fixed rates ofreturn. At December 31, 2007, approximately nine per cent (2006: 13 per cent) of VA funds were infixed accounts.

Jackson issues VA contracts where it contractually guarantees to the contractholder either a) returnof no less than total deposits made to the contract adjusted for any partial withdrawals, b) total depositsmade to the contract adjusted for any partial withdrawals plus a minimum return, or c) the highestcontract value on a specified anniversary date adjusted for any withdrawals following the contractanniversary. These guarantees include benefits that are payable in the event of death (guaranteedminimum death benefit (GMDB)), annuitization (guaranteed minimum income benefit (GMIB)), or atspecified dates during the accumulation period (guaranteed minimum withdrawal benefit (GMWB)) andguaranteed minimum accumulation benefit (GMAB). Jackson hedges these risks using equity options andfutures contracts as described in note D3(d).

(iii) Life insurance

Jackson’s life insurance products accounted for nine per cent (2006: 10 per cent) of Jackson’s policyand contract liabilities at December 31, 2007. The products offered include variable universal lifeinsurance, term life insurance and interest-sensitive life insurance.

(iv) Institutional products

Jackson’s institutional products consist of GICs, funding agreements (including agreements issued inconjunction with Jackson’s participation in the US Federal Home Loan Bank programme) andmedium-term note funding agreements. At December 31, 2007, institutional products accounted for12 per cent of policy and contract liabilities (2006: 12 per cent). Under a traditional GIC, thepolicyholder makes a lump sum deposit. The interest rate paid is fixed and established when the

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D: Life assurance business (Continued)

contract is issued. If deposited funds are withdrawn earlier than the specified term of the contract, anadjustment is made that approximates a market value adjustment.

Under a funding agreement, the policyholder either makes a lump sum deposit or makes specifiedperiodic deposits. Jackson agrees to pay a rate of interest, which may be fixed but which is usually afloating short-term interest rate linked to an external index. The average term of the fundingarrangements is one to two years. Funding agreements terminable by the policyholder with less than90 days’ notice account for less than one per cent (2006: less than one per cent) of total policyholderreserves.

Medium-term note funding agreements are generally issued to support trust instruments issued onnon-US exchanges or to qualified investors (as defined by SEC Rule 144A). Through the fundingagreements, Jackson agrees to pay a rate of interest, which may be fixed or floating, to the holders ofthe trust instruments.

(d) Risk management

Jackson’s main exposures are to market risk through its exposure to interest rate risk and equityrisk. Approximately 90 per cent (2006: 89 per cent) of its general account investments support interest-sensitive and fixed indexed annuities, life business and surplus and 10 per cent (2006: 11 per cent)support institutional business. All of these types of business contain considerable interest rate guaranteefeatures and, consequently, require that the assets that support them are primarily fixed income or fixedmaturity.

Prudential is exposed primarily to the following risks in the US arising from fluctuations in interestrates:

• The risk of loss related to meeting guaranteed rates of accumulation following a sharp andsustained fall in interest rates;

• the risk of loss related to policyholder withdrawals following a sharp and sustained increase ininterest rates; and

• the risk of mismatch between the expected duration of certain annuity liabilities and prepaymentrisk and extension risk inherent in mortgage-backed securities.

Jackson enters into financial derivative transactions, including those noted below to reduce andmanage business risks. These transactions manage the risk of a change in the value, yield, price, cashflows, or quantity of, or a degree of exposure with respect to assets, liabilities or future cash flows,which Jackson has acquired or incurred.

Jackson uses free-standing derivative instruments for hedging purposes. Additionally, certainliabilities, primarily trust instruments supported by funding agreements, fixed indexed annuities, certainGMWB variable annuity features and reinsured GMIB variable annuity features contain embeddedderivatives as defined by IAS 39, ‘Financial Instruments: Recognition and Measurement’. Jackson doesnot account for such derivatives as either fair value or cash flow hedges as might be permitted if thespecific hedge documentation requirements of IAS 39 were followed. Financial derivatives, including

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derivatives embedded in certain host liabilities that have been separated for accounting and financialreporting purposes are carried at fair value.

Value movements on the derivatives are reported within the income statement. The types ofderivatives used by Jackson and their purpose are as follows:

• Interest rate swaps generally involve the exchange of fixed and floating payments over the life ofthe agreement without an exchange of the underlying principal amount. These agreements areused for hedging purposes;

• forwards consist of interest spreadlock agreements, in which Jackson locks in the forward interestrate differential between a swap and the corresponding US Treasury security. The forwards areheld as a hedge of corporate spreads;

• put-swaption contracts provide the purchaser with the right, but not the obligation, to require thewriter to pay the present value of a long-duration interest rate swap at future exercise dates.Jackson purchases and writes put-swaptions with maturities up to 10 years. On a net basis,put-swaptions hedge against significant upward movements in interest rates;

• equity index futures contracts and equity index call and put options are used to hedge Jackson’sobligations associated with its issuance of fixed indexed immediate and deferred annuities andcertain VA guarantees. These annuities and guarantees contain embedded options which are fairvalued for financial reporting purposes;

• total return swaps in which Jackson receives equity returns or returns based on reference poolsof assets in exchange for short-term floating rate payments based on notional amounts, are heldfor both hedging and investment purposes;

• cross-currency swaps, which embody spot and forward currency swaps and additionally, in somecases, interest rate swaps and equity index swaps, are entered into for the purpose of hedgingJackson’s foreign currency denominated funding agreements supporting trust instrumentobligations;

• spread cap options are used as a macro-economic hedge against declining interest rates. Jacksonreceives quarterly settlements based on the spread between the two-year and the 10-yearconstant maturity swap rates in excess of a specified spread; and

• credit default swaps, represent agreements under which Jackson has purchased default protectionon certain underlying corporate bonds held in its portfolio. These contracts allow Jackson to sellthe protected bonds at par value to the counterparty in the event of their default in exchange forperiodic payments made by Jackson for the life of the agreement.

Note D3(h) parts (iii) and (iv) show the sensitivities of Jackson’s results through its exposure toequity risk and interest rate risk.

(e) Process for setting assumptions and determining contract liabilities

Under the MSB of reporting applied under IFRS 4 for insurance contracts, providing therequirements of the Companies Act, UK GAAP standards and the ABI SORP are met, it is permissible to

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reflect the previously applied UK GAAP basis. Accordingly, and consistent with the basis explained innote A4, in the case of Jackson the carrying values of insurance assets and liabilities are consolidatedinto the Group accounts based on US GAAP.

Under US GAAP, investment contracts (as defined for US GAAP purposes) are accounted for byapplying in the first instance a retrospective deposit method to determine the liability for policyholderbenefits. This is then augmented by potentially three additional amounts. These amounts are for:

• Any amounts that have been assessed to compensate the insurer for services to be performedover future periods (i.e. deferred income);

• any amounts previously assessed against policyholders that are refundable on termination of thecontract; and

• any probable future loss on the contract (i.e. premium deficiency).

Capitalized acquisition costs and deferred income for these contracts are amortized over the life ofthe book of contracts. The present value of the estimated gross profits is generally computed using therate of interest that accrues to policyholder balances (sometimes referred to as the contract rate).Estimated gross profits include estimates of the following elements, each of which will be determinedbased on the best estimate of amounts of the following individual elements over the life of the book ofcontracts without provision for adverse deviation for:

• Amounts expected to be assessed for mortality less benefit claims in excess of relatedpolicyholder balances;

• amounts expected to be assessed for contract administration less costs incurred for contractadministration;

• amounts expected to be earned from the investment of policyholder balances less interestcredited to policyholder balances;

• amounts expected to be assessed against policyholder balances upon termination of contracts(sometimes referred to as surrender charges); and

• other expected assessments and credits.

VA contracts written by Jackson may, as described above, provide for GMDB, GMIB, GMWB andGMAB features. In general terms, liabilities for these benefits are accounted for under US GAAP byusing estimates of future benefits and fees under best estimate persistency assumptions.

The GMDB liability is determined each period end by estimating the expected value of deathbenefits in excess of the projected account balance and recognizing the excess ratably over the life ofthe contract based on total expected assessments. At December 31, 2007, the GMDB liability wasvalued using a series of deterministic investment performance scenarios, a mean investment return of8.4 per cent (2006: 8.4 per cent) and assumptions for lapse, mortality and expense that are the same asthose used in amortizing the capitalized acquisition costs.

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The direct GMIB liability is determined by estimating the expected value of the annuitizationbenefits in excess of the projected account balance at the date of annuitization and recognizing theexcess ratably over the accumulation period based on total expected assessments.

The assumptions used for calculating the direct GMIB liability at December 31, 2007 and 2006 areconsistent with those used for calculating the GMDB liability.

Jackson regularly evaluates estimates used and adjusts the additional GMDB and GMIB liabilitybalances, with a related charge or credit to benefit expense, if actual experience or other evidencesuggests that earlier assumptions should be revised.

GMIB benefits are essentially fully reinsured, subject to annual claim limits. As this reinsurancebenefit is net settled, it is considered to be a derivative under IAS 39 and is, therefore, recognized atfair value with the change in fair value included as a component of short-term derivative fluctuations.

Most GMWB features are considered to be embedded derivatives under IAS 39. Therefore,provisions for these benefits are recognized at fair value, with the change in fair value included in netincome. Certain GMWB features guarantee payments over a lifetime and, therefore, include mortalityrisk. Provisions for these GMWB amounts are valued consistent with the GMDB valuation methoddiscussed above.

The fair values of the GMWB, GMIB and GMAB reinsurance derivatives are calculated based onactuarial assumptions related to the projected cash flows, including benefits and related contractcharges, over the expected lives of the contracts, incorporating expectations regarding policyholderbehavior in varying economic conditions. As the nature of these cash flows can be quite varied,stochastic techniques are used to generate a variety of market return scenarios for evaluation. Thegeneration of these scenarios and the assumptions as to policyholder behavior involve numerousestimates and subjective judgements, including those regarding expected market volatility, correlations ofmarket returns and discount rates, utilization of the benefit by policyholders under varying conditions,and policyholder lapsation. At each valuation date, Jackson assumes expected returns based on risk-freerates as represented by the LIBOR forward curve rates as of that date and market volatility asdetermined with reference to implied volatility data and evaluations of historical volatilities for variousindices. The risk-free spot rates as represented by the LIBOR spot curve as of the valuation date areused to determine the present value of expected future cash flows produced in the stochastic process.

With the exception of the GMDB, GMIB, GMWB and GMAB features of VA contracts, the financialguarantee features of Jackson’s contracts are in most circumstances not explicitly valued, but the impactof any interest guarantees would be reflected as they are earned in the current account value (i.e. theUS GAAP liability).

For traditional life insurance contracts, provisions for future policy benefits are determined underUS GAAP standards SFAS 60, ‘Accounting and Reporting by Insurance Enterprises’ using the net levelpremium method and assumptions as of the issue date as to mortality, interest, policy lapses andexpenses plus provisions for adverse deviation.

Institutional products are accounted for as investment contracts under IFRS with the liabilityclassified as being in respect of financial instruments rather than insurance contracts, as defined by

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IFRS 4. In practice, there is no material difference between the IFRS and US GAAP basis of recognitionand measurement for these contracts.

Certain institutional products representing obligations issued in currencies other than US dollarshave been hedged for changes in exchange rates using cross-currency swaps. The fair value ofderivatives embedded in funding agreements, as well as foreign currency transaction gains and losses,are included in the carrying value of the trust instruments supported by funding agreements recorded inother non-insurance liabilities.

(f) Reinsurance

The principal reinsurance ceded by Jackson outside the Group is on term life insurance, direct andassumed accident and health business and GMIB variable annuity guarantees. In 2007, the premiums forsuch ceded business amounted to £60 million (2006: £66 million; 2005: £78 million). Net commissionsreceived on ceded business and claims incurred ceded to external reinsurers totaled £10 million and£47 million, respectively, during 2007 (2006: £12 million and £53 million respectively; 2005: £13 millionand £54 million respectively). There were no deferred gains or losses on reinsurance contracts in either2007 or 2006. The reinsurance asset for business ceded outside the Group was £436 million (2006:£427 million).

(g) Effect of changes in assumptions used to measure insurance assets and liabilities

2007

The net income for US for 2007 has been determined after taking account of several changes ofassumptions during the year. Generally, assumptions were modified in 2007 to conform to more recentexperience. These changes included revisions to the assumptions regarding mortality rates, resulting inan increase in pre-tax profits of £14 million, and utilization of free partial withdrawal options, resulting ina decrease to pre-tax profits of £4 million. In addition, several smaller changes relating to lapse ratesand other assumptions resulted in a decrease of £2 million in pre-tax profits. Combined with other minormodifications, the resulting net impact of all changes during the year was an increase in pre-tax profitsof £8 million.

2006

The net income for US for 2006 has been determined after taking account of several changes ofassumptions during the year. Generally, assumptions were modified in 2006 to conform to more recentexperience. These changes included revisions to the assumptions regarding utilization of free partialwithdrawal options, resulting in a decrease in Deferred Acquisition Costs (DAC) of £12 million. Inaddition, several smaller changes relating to lapse rates, mortality rates and other assumptions resultedin an increase of £6 million in DAC. Combined with other minor modifications, the resulting net impactof all changes during the year was a decrease in pre-tax profits of £7 million.

2005

The net income for US operations for 2005 has been determined after taking account of materialchanges of assumptions during the year. Several assumptions were modified in 2005 to conform to more

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recent experience. The most significant changes included a DAC write-down of £21 million for singlepremium deferred annuities partial withdrawal changes and a Universal Life SOP 03-1, ‘‘Accounting andReporting by Insurance Enterprises for Certain Non-traditional Long Duration Contracts and SeparateAccounts’ reserve increase of £13 million due to increasing the mortality assumption. Several smallerchanges relating to single premium whole life surrenders and annuity mortality and annuitization rates,resulted in a £19 million benefit on adjusting amortization of DAC. Combined with other minormodifications, the resulting net impact of all changes during the year was a decrease in pre-tax profits of£7 million.

(h) Sensitivity of IFRS basis profit and equity to market and other risks

(i) Currency fluctuations

Consistent with the Group’s accounting policies, the profits of the Group’s US operations aretranslated at average exchange rates and shareholders’ equity at the closing rate for the reportingperiod. For 2007, the rates were US$2.00 (2006: US$1.84) and US$1.99 (2006: US$1.96) to £1 sterling,respectively. A 10 per cent increase or decrease in these rates would reduce or increase profit beforetax attributable to shareholders, profit for the year and shareholders’ equity attributable to US insuranceoperations respectively as follows:

A 10% increase in A 10% decrease inexchange rates exchange rates

2007 2006 2007 2006

£ million £ million £ million £ million

Profit before tax attributable to shareholders . . . . . . . . . . . . (39) (42) 48 51Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (29) (29) 35 35Shareholders’ equity attributable to US insurance operations . . (242) (247) 296 293

(ii) Other sensitivities

The principal determinants of variations in net income are:

• growth in the size of assets under management covering the liabilities for the contracts in force;

• incidence of guarantees;

• spread returns for the difference between investment returns and rates credited to policyholders;and

• amortization of deferred acquisition costs.

For term business, acquisition costs are deferred and amortized in line with expected premiums. Forannuity business, acquisition costs are deferred and amortized in line with expected gross profits on therelevant contracts. For interest-sensitive business, the key assumption is the expected long-term spreadbetween the earned rate and the rate credited to policyholders, which is based on an annual spreadanalysis. In addition, expected gross profits depend on mortality assumptions, assumed unit costs andterminations other than deaths (including the related charges) all of which are based on a combinationof actual experience of Jackson, industry experience and future expectations. A detailed analysis of

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actual experience is measured by internally developed mortality and persistency studies. For variableannuity business, the key assumption is the expected long-term level of equity market returns, which for2007, 2006 and 2005 was 8.4 per cent per annum implemented using a mean reversion methodology.These returns affect the level of future expected profits through their effects on the fee income and therequired level of provision for guaranteed minimum death benefit claims.

• Variations in fees and other income, offset by variations in market value adjustment paymentsand, where necessary, strengthening of liabilities.

Except to the extent of mortality experience, which primarily affects profits through variations inclaim payments and GMDB reserves, the profits of Jackson are relatively insensitive to changes ininsurance risk.

(iii) Exposure to equity risk

As noted in note D3(d), Jackson is exposed to equity risk through the options embedded in thefixed indexed liabilities and GMDB and GMWB guarantees included in certain VA benefits. This risk ismanaged using a comprehensive equity hedging programme to minimize the risk of a significanteconomic impact as a result of increases or decreases in equity market levels while taking advantage ofnaturally offsetting exposures in Jackson’s operations. Jackson purchases external futures and optionsthat hedge the risks inherent in these products, while also considering the impact of rising and fallingseparate account fees. As a result of this hedging programme, if the equity markets were to increase,Jackson’s free-standing derivatives would decrease in value. However, over time, this movement wouldbe broadly offset by increased separate account fees and reserve decreases, net of the related changesto amortization of deferred acquisition costs. Due to the nature of the free-standing and embeddedderivatives, this hedge, while highly effective on an economic basis, may not completely mute theimmediate impact of the market movements as the free-standing derivatives reset immediately while thehedged liabilities reset more slowly (see note D3(e) for further details on the valuation of theguarantees) and fees are recognized prospectively. It is estimated that an immediate increase in theequity markets of 10 per cent would result in an accounting charge, net of related DAC amortization,before tax of up to £30 million (2006: £20 million), excluding the impact on future separate accountfees. After related deferred tax there would have been an estimated reduction in shareholders’ equity atDecember 31, 2007 of up to £20 million (2006: £13 million). An immediate decrease in the equitymarkets of 10 per cent would result in an approximately equal and opposite estimated effect on profitand shareholders’ equity. The actual impact on financial results would vary contingent upon the volumeof new product sales and lapses, changes to the derivative portfolio, correlation of market returns andvarious other factors including volatility, interest rates and elapsed time.

In addition, Jackson is also exposed to equity risk from its holding of equity securities, partnershipsin investment pools and other financial derivatives.

A 10 per cent decrease in their value would have given rise to an estimated £76 million (2006:£66 million) reduction in pre-tax profit, net of related changes in amortization of DAC, for 2007. Afterrelated deferred tax there would have been an estimated £50 million (2006: £43 million) reduction inshareholders’ equity at December 31, 2007. A 10 per cent increase in their value would have anapproximately equal and opposite effect on profit and shareholders’ equity.

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(iv) Exposure to interest rate risk

Notwithstanding the market risk exposure described in note D3(d), except in the circumstances ofinterest rate scenarios where the guarantee rates included in contract terms are higher than creditingrates that can be supported from assets held to cover liabilities, the accounting measurement ofliabilities of Jackson products is not generally sensitive to interest rate risk. This position derives fromthe nature of the products and the US GAAP basis of measurement described in notes D3(c) and D3(e).

However, the debt securities and related derivatives are marked to market value. Value movementson derivatives, again net of related changes to amortization of DAC and deferred tax, are recordedwithin profit and loss. Market value movements on debt securities, net of related changes toamortization of DAC and deferred tax, are recorded within the statement of changes in equity. Theestimated sensitivity of these items and policyholder liabilities to a one per cent decrease and increase ininterest rates at December 31, 2007 and 2006 is as follows:

A 1% decrease in A 1% increase ininterest rates interest rates

2007 2006 2007 2006

£ million £ million £ million £ million

Profit and lossDirect effect

Derivatives value change . . . . . . . . . . . . . . . . . . . . . . . . (116) (95) 163 109Policyholder liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (38) (7) 29 3

Related effect on amortization of DAC . . . . . . . . . . . . . . . . 52 29 (58) (30)

Pre-tax profit effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (102) (73) 134 82Related effect on charge for deferred tax . . . . . . . . . . . . . . 36 26 (47) (29)

Net profit effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66) (47) 87 53

Statement of changes in equityDirect effect on carrying value of debt securities . . . . . . . . . 848 858 (848) (858)Related effect on amortization of DAC . . . . . . . . . . . . . . . . (212) (214) 212 214Related effect on movement in deferred tax . . . . . . . . . . . . . (223) (225) 223 225

Net effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 419 (413) (419)

Total net effect on IFRS equity . . . . . . . . . . . . . . . . . . . . . 347 372 (326) (366)

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(i) Duration of liabilities

The Group uses cash flow projections of expected benefit payments as part of the determination ofthe value of in-force business when preparing EEV basis results. The maturity profile of the cash flowsused for that purpose for 2007 and 2006 is as follows:

2007 2006

Fixed annuity Fixed annuityand other and otherbusiness business

(including (includingGICs and GICs andsimilar Variable similar Variable

contracts) annuity contracts) annuity

£ million £ million £ million £ million

Policyholder liabilities . . . . . . . . . . . . . . . . . . . . . 19,821 15,027 20,379 11,367

% % % %

Expected maturity:0 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 48 53 485 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 30 26 3010 to 15 years . . . . . . . . . . . . . . . . . . . . . . . . . . 11 13 11 1315 to 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6 5 620 to 25 years . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 3 2Over 25 years . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1 2 1

The maturity tables shown above have been prepared on a discounted basis. Details ofundiscounted cash flows for investment contracts are shown in note G2.

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D4: Asian insurance operations

(a) Summary balance sheet at December 31, 2007Asian insurance

operationsWith-profits Unit-linkedbusiness assets and 2007 2006(note i) liabilities Other Total Total

£ million £ million £ million £ million £ millionAssetsIntangible assets attributable to shareholders:

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 111 111 111Deferred acquisition costs and other intangible assets . . — — 745 745 612

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 856 856 723

Other non-investment and non-cash assets . . . . . . . . . . 134 58 570 762 602Investments of long-term business and other operations:

Investment properties . . . . . . . . . . . . . . . . . . . . . — — 14 14 41Financial investments

Loans (note ii) . . . . . . . . . . . . . . . . . . . . . . . . 560 37 490 1,087 904Equity securities and portfolio holdings in unit trusts . 4,472 4,728 604 9,804 6,894Debt securities (note iii) . . . . . . . . . . . . . . . . . . 2,329 1,901 2,690 6,920 5,391Other investments . . . . . . . . . . . . . . . . . . . . . 13 6 23 42 87Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 118 215 377 408

Total investments . . . . . . . . . . . . . . . . . . . . . . . 7,418 6,790 4,036 18,244 13,725

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . 194 123 362 679 618

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,746 6,971 5,824 20,541 15,668

Equity and liabilitiesEquityShareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . — — 1,369 1,369 1,287Minority interests . . . . . . . . . . . . . . . . . . . . . . . . — — 7 7 —

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,376 1,376 1,287

LiabilitiesPolicyholder liabilities and unallocated surplus of

with-profits funds:Insurance contract liabilities . . . . . . . . . . . . . . . . . 6,280 6,971 3,661 16,912 12,706Investment contract liabilities with discretionary

participation features . . . . . . . . . . . . . . . . . . . . 84 — — 84 68Investment contract liabilities without discretionary

participation features . . . . . . . . . . . . . . . . . . . . 37 — — 37 27Unallocated surplus of with-profits funds . . . . . . . . . . 146 — — 146 88

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,547 6,971 3,661 17,179 12,889

Other non-insurance liabilities . . . . . . . . . . . . . . . . . 1,199 — 787 1,986 1,492

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 7,746 6,971 4,448 19,165 14,381

Total equity and liabilities . . . . . . . . . . . . . . . . . . 7,746 6,971 5,824 20,541 15,668

Notes

(i) The balance sheet for with-profits business comprises the with-profits assets and liabilities of the Hong Kong, Malaysia andSingapore with-profits operations. Assets and liabilities of other participating business are included in the column for ‘otherbusiness’.

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(ii) The loans of the Group’s Asian insurance operations of £1,087 million comprise mortgage loans of £132 million, policy loansof £430 million and other loans of £525 million. The mortgage and policy loans are secured by properties and life insurancepolicies respectively. The majority of the other loans are commercial loans held by the Malaysian operation and which are allinvestment graded by two local rating agencies.

(iii) Credit quality of debt securities The following table summarizes the credit quality of the debt securities of the Asian insuranceoperations as at December 31, 2007 by rating agency rating:

With-profits Unit-linked Otherbusiness business business Total

£ million £ million £ million £ millionS&P—AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,367 660 257 2,284S&P—AA+ to AA- . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 153 1,599 1,994S&P—A+ to A- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299 271 105 675S&P—BBB+ to BBB- . . . . . . . . . . . . . . . . . . . . . . . . . . . 142 34 17 193S&P—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 47 94 149

2,058 1,165 2,072 5,295

Moody’s—Aaa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 185 — 201Moody’s—Aa1 to Aa3 . . . . . . . . . . . . . . . . . . . . . . . . . . 7 19 19 45Moody’s—A1 to A3 . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 16 1 28Moody’s—Baa1 to Baa3 . . . . . . . . . . . . . . . . . . . . . . . . . 12 7 — 19Moody’s—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 — — 58

104 227 20 351

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 509 598 1,274

Total debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . 2,329 1,901 2,690 6,920

Of the £598 million debt securities for other business which are not rated in the table above,£317 million are in respect of government bonds, £83 million corporate bonds rated as investment gradeby local external ratings agencies, and £71 million structured deposits issued by banks which arethemselves rated but where the specific deposits have not been.

Summary policyholder liabilities (net of reinsurance) and unallocated surplus

The policyholder liabilities (net of reinsurance of £12 million (2006: £8 million)) and unallocatedsurplus shown in the table above reflect the following balances:

2007 2006

£ million £ million

With-profits business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,397 5,410Unallocated surplus of Asian with-profit operations . . . . . . . . . . . . . . . . . . . . . . 146 88Unit-linked business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,971 4,134Other business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,653 3,249

17,167 12,881

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At December 31, 2007, the policyholder liabilities (net of reinsurance) and unallocated surplus forAsian operations of £17.2 billion (2006: £12.9 billion) comprised the following:

2007 2006

£ million £ million

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,462 4,355Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,901 3,045Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,781 2,249Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,201 895Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 695 572Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,127 1,765

Total Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,167 12,881

(b) Products and guarantees

The life insurance products offered by the Group’s Asian operations include a range of with-profitsand non-participating term, whole life, endowment and unit-linked policies. The Asian operations alsooffer health, disability, critical illness and accident coverage to supplement its core life products.

The terms and conditions of the contracts written by the Asian operations and, in particular, theproducts’ options and guarantees, vary from territory to territory depending upon local marketcircumstances.

In general terms, the Asian participating products provide savings and protection where the basicsum assured can be enhanced by a profit share (or bonus) from the underlying fund as determined atthe discretion of the insurers. The Asian operations’ non-participating term, whole life and endowmentproducts offer savings and/or protection where the benefits are guaranteed or determined by a set ofdefined market related parameters. Unit-linked products combine savings with protection, the cash valueof the policy depends on the value of the underlying unitized funds. Accident and Health (A&H) policiesprovide mortality or morbidity benefits and include health, disability, critical illness and accidentcoverage. A&H products are commonly offered as supplements to main life policies but can be soldseparately.

Subject to local market circumstances and regulatory requirements, the guarantee featuresdescribed in note D2(c) in respect of UK business broadly apply to similar types of participatingcontracts written in the Hong Kong branch, Singapore and Malaysia. Participating products have bothguaranteed and non-guaranteed elements.

Non-participating long-term products are the only ones where the insurer is contractually obliged toprovide guarantees on all benefits. Investment-linked products have the lowest level of guarantee ifindeed they have any.

Product guarantees in Asia can be broadly classified into four main categories; namely premiumrate, cash value and interest rate guarantees, policy renewability and convertibility options.

The risks on death coverage through premium rate guarantees are low due to appropriate productpricing.

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Cash value and interest rate guarantees are of three types:

• Maturity valuesMaturity values are guaranteed for non-participating products and on the guaranteed portion ofparticipating products. Declared annual bonuses are also guaranteed once vested. Future bonusrates and cash dividends are not guaranteed on participating products.

• Surrender valuesSurrender values are guaranteed for non-participating products and on the guaranteed portion ofparticipating products. The surrender value of declared reversionary bonuses are also guaranteedonce vested.

Market value adjustments and surrender penalties are used where the law permits suchadjustments in cash values.

• Interest rate guaranteesIt is common in Asia for regulations or market driven demand and competition to provide someform of capital value protection and minimum crediting interest rate guarantees. This would bereflected within the guaranteed maturity and surrender values.

The guarantees are borne by shareholders for non-participating and investment-linked(non-investment guarantees only) products. Participating product guarantees are predominantlysupported by the segregated life funds and their estates.

The most significant book of non-participating business in the Asian operations is Taiwan’s whole oflife contracts. For these contracts there are floor levels of policyholder benefits that accrue at rates setat inception which are set by reference to minimum terms established by local regulation also at thetime of inception. These rates do not vary subsequently with market conditions.

Under these contracts, the cost of premiums are also fixed at inception based on a number ofassumptions at that time, including long-term interest rates, mortality assumptions and expenses. Theguaranteed maturity and surrender values reflect the pricing basis. The main variable that determines theamounts payable under the contracts is the duration of the contracts, which is determined by death orsurrender. The sensitivity of the IFRS result for these contracts is shown in note (g) below.

Whole of life contracts with floor levels of policyholder benefits that accrue at rates set at inceptionare also written in the Korean life operations, though to a much less significant extent than in Taiwan.The Korean business has non-linked liabilities and linked liabilities at December 31, 2007 of £261 millionand £728 million respectively (2006: £226 million and £316 million respectively). The business is muchless sensitive to returns than Taiwan with a higher proportion of linked and health business.

The other area of note in respect of guarantees is the Japanese business where pricing rates arehigher than current bond yields. Lapse risk is a feature in that policyholders could potentially surrendertheir policies on guaranteed terms if interest rates significantly increased leaving the potential for lossesif bond values had depreciated significantly. However, the business is matched to a relatively shortrealistic liability duration.

The method for determining liabilities of insurance contracts for UK GAAP, and hence IFRS,purposes for some Asian operations is based on US GAAP principles and this method applies to

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

contracts with cash value and interest rate guarantees. Following standard US GAAP procedure,premium deficiency reserve calculations are performed each year to establish whether the carryingvalues of the liabilities are sufficient.

On the US GAAP basis the calculations are deterministic, that is to say based on a single set ofprojections, and expected long-term rates of return are applied.

(c) Exposure to market risk

The Asian operations sell with-profits and unit-linked policies and, although the with-profits businessgenerally has a lower terminal bonus element than in the UK, the investment portfolio still contains aproportion of equities and, to a lesser extent, property. Non-participating business is largely backed bydebt securities or deposits. With the principal exception of Taiwan’s whole of life policy book, asdescribed in note (g) below, the exposure to market risk of the Group arising from its Asian operationsis at modest levels. This arises from the fact that the Asian operations have a balanced portfolio ofwith-profits, unit-linked and other types of business.

(d) Process for setting assumptions and determining liabilities

The future policyholder benefit provisions for Asian businesses in the Group’s IFRS accounts andpreviously under the MSB, are determined in accordance with methods prescribed by local GAAPadjusted to comply, where necessary, with UK GAAP.

For Asian operations in countries where local GAAP is not well established and in which thebusiness written is primarily non-participating and linked business, US GAAP is used as the mostappropriate reporting basis. Of the more significant Asian operations, this basis is applied in Taiwan,Japan and Vietnam. The future policyholder benefit provisions for non-linked business are determinedunder FAS 60 using the net level premium method, with an allowance for surrenders, maintenance andclaims expenses. Rates of interest used in establishing the policyholder benefit provisions vary byoperation depending on the circumstances attaching to each block of business.

For the traditional business in Taiwan, the economic scenarios used to calculate the IFRS resultsreflect the assumption of a phased progression of bond yields from current rates to long-term expectedrates. The projections assume that the current bond yields of around 2.5 per cent (2006: 2 per cent)trend towards 5.5 per cent (2006: 5.5 per cent) at December 31, 2013 (2006: 2013).

(e) Reinsurance

The Asian businesses cede only minor amounts of business outside the Group with immaterialeffects on reported profit. During 2007, reinsurance premiums for externally ceded business were£52 million (2006: £47 million; 2005: £37 million) and the reinsurance assets were £12 million (2006:£8 million) in aggregate.

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(f) Effect of changes in bases and assumptions used to measure insurance assets andliabilities

There are no changes of assumptions that had a material impact on the 2007 and 2006 results ofAsian operations.

2005

The 2005 results for Asian operations were affected in two significant ways for changes of basis orassumption.

For the Singapore life business, under the basis applied previously for 2004 and earlier, liabilities ofnon-participating business were determined on a net premium basis using prescribed interest rates suchthat a very high degree of prudence resulted. This basis has been replaced under the Singaporerisk-based capital framework, with one that, although still including provisions for adverse deviation,more accurately estimates the liability. This resulted in a change of estimate and reduction in the liabilityof £73 million.

The second item reflects the application of liability adequacy testing for the Taiwan life businesswhich has resulted in a write-off of deferred acquisition costs of £21 million in 2005. The assumptionsfor future investment returns for Taiwan are described in note (d) above. The loss reflects the reductionin 2005 in the expected yields over the trending period to the assumed long-term rate of 5.5 per centfor Taiwanese government bonds.

Consistent with the application of US GAAP for Taiwanese insurance contracts under IFRS 4, thiswrite-off resulted from a premium deficiency as defined under paragraphs 35-37 of SFAS 60,‘‘Accounting and Reporting by Insurance Enterprises’ (SFAS 60), and a resulting unlocking of actuarialassumptions in accordance with paragraph 21 of SFAS 60.

Under the standard liability adequacy testing required by SFAS 60, the net amount for the presentvalue of future payments for benefits and claims less present value of future premiums, determinedusing revised assumptions based on actual and anticipated experience, i.e. the best estimate amount,has been compared against the balance sheet liability for policy benefits less unamortized acquisitioncosts.

There were no other changes of assumptions that had a material impact on the 2005 results ofAsian operations.

(g) Sensitivity of IFRS basis profit and equity to market and other risks

Currency translation

Consistent with the Group’s accounting policies, the profits of the Asian operations are translated ataverage exchange rates and shareholders’ equity at the closing rate for the reporting period. For 2007,the rates for the most significant operations are given in note B3.

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

A 10 per cent increase or decrease in these rates and those of other Asian operations would havereduced or increased profit before tax attributable to shareholders, profit for the year and shareholders’equity, excluding goodwill, attributable to Asian operations respectively as follows:

A 10% increase in A 10% decrease inexchange rates exchange rates

2007 2006 2007 2006

£ million £ million £ million £ million

Profit before tax attributable to shareholders . . . . . . . . . . . . (16) (33) 20 34Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) (21) 13 25Shareholders’ equity, excluding goodwill, attributable to Asian

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (124) (116) 151 143

Other risks

(i) With-profits business

Similar principles to those explained for UK with-profits business apply to profit emergence for theAsian with-profits business. Correspondingly, the profit emergence reflects bonus declaration and isrelatively insensitive to period by period fluctuations in insurance risk or interest rate movements.

(ii) Unit-linked business

As for the UK insurance operations, the profits and shareholders’ equity related to the Asianoperations is primarily driven by charges related to invested funds. For the Asian operations,substantially all of the contracts are classified as insurance contracts under IFRS 4, i.e. containingsignificant insurance risk. The sensitivity of profits and equity to changes in insurance risk is minor and,to interest rate risk, not material.

(iii) Other business

Taiwan whole of life business—interest rate risk on deferred acquisition costs and policyholders’ liabilities

The principal other business of Asian operations is the traditional whole of life business written inTaiwan.

The in-force business of the Taiwan life operation includes traditional whole of life policies wherethe premium rates have been set by the regulator at different points for the industry as a whole.Premium rates were set to give a guaranteed minimum sum assured on death and a guaranteedsurrender value on early surrender based on prevailing interest rates at the time of policy issue.Premium rates also included allowance for mortality and expenses. The required rates of guarantee havefallen over time as interest rates have reduced from a high of eight per cent to current levels of around2.5 per cent. The current low level of bond rates in Taiwan gives rise to a negative spread for themajority of these policies. The current cash cost of funding in-force negative spread in Taiwan is around£45 million a year.

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

The profits attaching to these contracts are particularly affected by the rates of return earned, andestimated to be earned, on the assets held to cover liabilities and on future investment income andcontract cash flows. Under IFRS, the insurance contract liabilities of the Taiwan business are determinedon the US GAAP basis as applied previously under UK GAAP. Under this basis, the policy liabilities arecalculated on sets of assumptions, which are locked in at the point of policy inception, and a deferredacquisition cost is held in the balance sheet.

The adequacy of the insurance contract liabilities is tested by reference to best estimates ofexpected investment returns on policy cash flows and reinvested income. The assumed earned rates areused to discount the future cash flows. The assumed earned rates consist of a long-term best estimatedetermined by consideration of long-term market conditions and rates assumed to be earned in thetrending period. For 2007 and 2006, it has been projected that rates of return for Taiwanese bond yieldswill trend from the then current levels of some 2.5 per cent (2.0 per cent) to 5.5 per cent byDecember 31, 2013.

The liability adequacy test results are sensitive to the attainment of the trended rates during thetrending period. Based on the current asset mix, margins in other contracts that are used in theassessment of the liability adequacy tests and currently assumed future rates of return, if interest rateswere to remain at current levels in 2008 and 2009 and the target date for attainment of the long-termbond yield deferred to December 31, 2015, the premium reserve, net of deferred acquisition costs,would be sufficient. If interest rates were to remain at current levels beyond the end of 2009 with thedate of the attainment of the long-term rate further delayed, the margin within the net GAAP reservewill reduce further.

However, the need to write off deferred acquisition costs or increase the liabilities, and by howmuch, would be affected by the impact of new business written between December 31, 2007 and thefuture reporting dates to the extent that the business is taken into account as part of the liabilityadequacy testing calculations for the portfolio of contracts.

The adequacy of the liability is also sensitive to the level of the projected long-term rate on bonds.The current long-term assumption of 5.5 per cent has been determined on a prudent best estimate basisby reference to detailed assessments of the financial dynamics of the Taiwanese economy. In the eventthat the rate applied was altered, the carrying value of the deferred acquisition costs and policyholderliabilities would potentially be affected.

At December 31, 2007, if the assumed long-term bond yield applied had been reduced by 0.5 percent from 5.5 per cent to 5.0 per cent and continued to apply the same progression period toDecember 31, 2013, by assuming bond yields increase from current levels in equal annual instalments tothe long-term rate, the premium reserve, net of deferred acquisition costs, would have been sufficient.The impact of reducing the long-term rate by a further 0.5 per cent to 4.5 per cent would have beensuch that the net GAAP reserve would have met the liability adequacy test but with no margin availableto cover further deterioration. An additional 0.5 per cent reduction in the assumed long-term rate from4.5 per cent to 4.0 per cent would lead to a charge of some £200 million.

The adequacy of the Taiwan insurance contract liabilities is also sensitive to movements inshort-term movements in market interest rates. This is because a reduction in the current interest rateswould alter the progression rate to the long-term rate and the assumed timing of attainment of the rate

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

may be insufficient and they would have been deferred. If the interest rates at December 31, 2006 ofcirca 2 per cent had been lower by 0.5 per cent and the date for the attainment of the long-term ratedeferred by one year to 2014 the effect on the net premium reserve would have been a charge ofapproximately £60 million.

If the interest rate at December 31, 2007 of circa 2.5 per cent had been lower by 0.5 per cent withthe same progression period and long-term rate the net premium reserve would have been adequateand no charge would have been necessary.

For the Korean and Japanese life business exposures described in note (b) above, the results arecomparatively unaffected by changes of assumption. The accounts basis value of liabilities for bothoperations are of a similar order of magnitude to those that apply for the purposes of Group solvencycalculations under the Insurance Groups Directive (IGD).

Interest rate risk for other business excluding Taiwan

In addition to the sensitivity of the Taiwan results to the impact of current period and longer-terminterest rates on liability adequacy tests, as described above, the other business and solvency capital ofAsian operations are also sensitive to the vagaries of routine movements in interest rates.

Asian operations offer a range of insurance and investment products, predominantly with-profitsand non-participating term, whole life endowment and unit linked.

Excluding with-profit and unit-linked business along with Taiwan, which is detailed above, 72 percent (2006: 78 per cent) of the bond portfolio for other business of Asian operations at December 31,2007 was held in Japan, Singapore and Vietnam with corporate bond rates varying from territory toterritory and ranging from 1.5 per cent to 9.1 per cent at December 31, 2007 (1.7 per cent to 8.8 percent at December 31, 2006) for these three countries. An analysis of movements in bond rates duringprevious periods and its impact on IFRS basis profit or loss and shareholders’ equity has beenundertaken, with reasonably possible movements for these countries being considered to be 0.25 percent for Japan, 0.5 per cent for Singapore and 1.0 per cent for Vietnam.

Based on these movements, plus indicative changes for bonds held in other Asian operations withinthe region, the impact on IFRS basis profit or loss and shareholders’ equity from a reasonably possiblechange in interest rates for Asian operations excluding Taiwan at December 31, 2007 has been assessed,with rate movements ranging from 0.25 per cent to 1.0 per cent (2006: 0.25 per cent to 1.0 per cent)dependent on country. Looking at the region in aggregate and noting that interest rates are unlikely tomove consistently by the same degree from period to period, the range of movements considered to bereasonably possible would result in a change in IFRS profit or loss of plus or minus £30 million (2006:£32 million). These amounts, if they arose, would be recorded within the category short-termfluctuations in investment returns in the Group’s supplementary analysis of profit before tax. Afteradjusting for deferred tax the reasonably possible effect on shareholders’ equity is plus or minus£22 million (2006: £24 million).

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Equity price risk

The principal holders of equity securities are the Taiwan, Singapore and Vietnam businesses. For theTaiwan and Singapore operations market changes have a direct effect on profit and loss with nomatching effect on the carrying value of policyholder liabilities. This is also true for the Vietnambusiness. However, to the extent that equity investment appreciation is realized through sales ofsecurities then policyholders’ liabilities are adjusted to the extent that policyholders’ participate.

The impact of a 10 per cent change in equity prices for shareholder-backed Asian other businesswould be as follows:

2007 2006

10% 10% 10% 10%increase decrease increase decrease

£ million £ million £ million £ million

Pre-tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 (73) 67 (67)Related deferred tax (where applicable) . . . . . . . . . . . . . . (5) 5 (8) 8

Net effect on profit and equity . . . . . . . . . . . . . . . . . . . . 68 (68) 59 (59)

(h) Duration of liabilities

The Group uses cash flow projections of expected benefit payments as part of the determination ofthe value of in-force business when preparing EEV basis results. The maturity profile of the cash flows,taking account of expected future premiums and investment returns, is as follows:

2007 2006

£ million £ million

Policyholder liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,033 12,801

% %

Expected maturity:0 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 225 to 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 2010 to 15 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1615 to 20 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1320 to 25 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 10Over 25 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 19

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

D5: Capital position statement for life assurance businesses

(a) Summary statement

The Group’s estimated capital position for life assurance businesses with reconciliations toshareholders’ equity is shown below. Available capital for each fund or group of companies for theGroup’s life assurance business shown in the table below is determined by reference to local regulationat December 31, 2007 and 2006. Group capital requirements also apply as discussed in note D5 (b)(iv).

ParentOther UK company and

Total life shareholders’PAC assurance equity ofwith- subsidiaries Asian life Total life other

WPSF profits and funds assurance assurance subsidiaries GroupDecember 31, 2007 SAIF (note i) fund (note ii) Jackson subsidiaries operations M&G and funds total

£ million £ million £ million £ million £ million £ million £ million £ million £ million £ million

Group shareholders’ equityHeld outside long-term funds:

Net assets . . . . . . . . . . . . . — — — 550 2,690 1,258 4,498 271 (723) 4,046Goodwill . . . . . . . . . . . . . . — — — — — 111 111 1,153 77 1,341

Total . . . . . . . . . . . . . . . . . — — — 550 2,690 1,369 4,609 1,424 (646) 5,387Held in long-term funds (note iii) . — — — 814 — — 814 — — 814

Total Group shareholders’ equity . . — — — 1,364 2,690 1,369 5,423 1,424 (646) 6,201

Adjustments to regulatory basisUnallocated surplus of with-profits

funds (note v) . . . . . . . . . . . — 14,205 14,205 — — 146 14,351Shareholders’ share of realistic

liabilities . . . . . . . . . . . . . . — (4,178) (4,178) — — — (4,178)Deferred acquisition costs of

non-participating business andgoodwill not recognized forregulatory reporting purposes . . (4) (15) (19) (143) (1,928) (790) (2,880)

Jackson surplus notes (note iv) . . . — — — — 125 — 125Adjustment from IAS 19 basis

pension surplus attributable toWPSF to pension liability forregulatory purposes (note vii) . . — (530) (530) — — — (530)

Valuation difference on PALbetween IFRS basis andregulatory basis . . . . . . . . . . — (1,117) (1,117) — — — (1,117)

Other adjustments to restate theseamounts to a regulatory basis(with SAIF and the WPSF on aPeak 2 realistic basis) (note v) . . 4 355 359 (239) 1,364 (96) 1,388

Total adjustments . . . . . . . . . . . 0 8,720 8,720 (382) (439) (740) 7,159

Total available capital resourcesof life assurance businesseson local regulatory bases . . . 0 8,720 8,720 982 2,251 629 12,582

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Other UKTotal lifePAC assurancewith- subsidiaries Asian life Total life

WPSF profits and funds assurance assuranceDecember 31, 2007 SAIF (note i) fund (note ii) Jackson subsidiaries operations

£ million £ million £ million £ million £ million £ million £ millionPolicyholder liabilitiesWith-profits liabilities of UK

regulated with-profits funds:Insurance contracts . . . . . . . . . . . . . . . . . . 12,672 34,029 46,701 — — 3,307 50,008Investment contracts (with discretionary

participating features) . . . . . . . . . . . . . . . 693 28,773 29,466 — — 84 29,550

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 13,365 62,802 76,167 — — 3,391 79,558

Other liabilities:Insurance contracts:

With-profits liabilities of non-UK regulatedfunds . . . . . . . . . . . . . . . . . . . . . . . 2,973 2,973

Unit-linked, including variable annuity . . . . . 2,029 2,029 8,198 15,027 6,971 32,225Other life assurance business . . . . . . . . . . 255 11,494 11,749 14,121 17,899 3,661 47,430

Investment contracts without discretionaryparticipation features (principally unit-linkedand similar contracts in the UK and GICliabilities of Jackson) (note vi) . . . . . . . . . . 14 14 12,059 1,922 37 14,032

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 255 13,537 13,792 34,378 34,848 13,642 96,660

Total policyholder liabilities shown in theconsolidated balance sheet . . . . . . . . . . . 13,620 76,339 89,959 34,378 34,848 17,033 176,218

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

ParentOther UK company and

Total life shareholders’PAC assurance equity ofwith- subsidiaries Asian life Total life other

WPSF profits And funds assurance assurance subsidiaries GroupDecember 31, 2006 SAIF (note i) fund (note ii) Jackson subsidiaries operations M&G Egg and funds total

£million £million £million £million £million £million £million £million £million £million £million

Group shareholders’ equityHeld outside long-term funds:

Net assets . . . . . . . . . . — — — 612 2,656 1,176 4,444 230 292 (1,519) 3,447Goodwill . . . . . . . . . . . — — — — — 111 111 1,153 — 77 1,341

Total . . . . . . . . . . . . . . . — — — 612 2,656 1,287 4,555 1,383 292 (1,442) 4,788Held in long-term funds

(note iii) . . . . . . . . . . . — — — 700 — — 700 — — — 700

Total Group shareholders’equity . . . . . . . . . . . . — — — 1,312 2,656 1,287 5,255 1,383 292 (1,442) 5,488

Adjustments to regulatorybasis

Unallocated surplus ofwith-profits funds (note v) . — 13,511 13,511 — — 88 13,599

Shareholders’ share ofrealistic liabilities . . . . . . — (4,000) (4,000) — — — (4,000)

Deferred acquisition costs ofnon-participating businessand goodwill notrecognized for regulatoryreporting purposes . . . . . (5) (26) (31) (146) (1,712) (673) (2,562)

Jackson surplus notes(note iv) . . . . . . . . . . . — — — — 127 — 127

Part of IAS 19 basis pensiondeficit attributable to WPSFnot recognized forregulatory purposes(note vii) . . . . . . . . . . . — (244) (244) — — — (244)

Valuation difference on PALbetween IFRS basis andregulatory basis . . . . . . . — (1,076) (1,076) — — — (1,076)

Other adjustments to restatethese amounts to aregulatory basis (with SAIFand the WPSF on a Peak 2realistic basis) (note v) . . . 5 523 528 (263) 1,012 (136) 1,141

Total adjustments . . . . . . . 0 8,688 8,688 (409) (573) (721) 6,985

Total available capitalresources of lifeassurance businesses onlocal regulatory bases . . 0 8,688 8,688 903 2,083 566 12,240

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

Other UKTotal lifePAC assurancewith- subsidiaries Asian life Total life

WPSF profits and funds assurance assuranceDecember 31, 2006 SAIF (note i) fund (note ii) Jackson subsidiaries operations

£ million £ million £ million £ million £ million £ million £ millionPolicyholder liabilitiesWith-profits liabilities of UK regulated with-profits

funds:Insurance contracts . . . . . . . . . . . . . . . . . . 13,162 31,925 45,087 — — 2,659 47,746Investment contracts (with discretionary

participating features) . . . . . . . . . . . . . . . 737 27,928 28,665 — — 68 28,733

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 13,899 59,853 73,752 — — 2,727 76,479

Other liabilities:Insurance contracts:

With-profits liabilities of non-UK regulatedfunds . . . . . . . . . . . . . . . . . . . . . . . — — — — — 2,658 2,658

Unit-linked, including variable annuity . . . . . — 2,039 2,039 7,766 11,367 4,134 25,306Other life assurance business . . . . . . . . . . 231 12,245 12,476 12,955 18,817 3,255 47,503

Investment contracts without discretionaryparticipation features (principally unit-linkedand similar contracts in the UK and GICliabilities of Jackson) (note vi) . . . . . . . . . . — 12 12 11,441 1,562 27 13,042

Total . . . . . . . . . . . . . . . . . . . . . . . . . . 231 14,296 14,527 32,162 31,746 10,074 88,509

Total policyholder liabilities shown in theconsolidated balance sheet . . . . . . . . . . 14,130 74,149 88,279 32,162 31,746 12,801 164,988

Notes

(i) WPSF unallocated surplus includes amounts related to the Hong Kong branch. Policyholder liabilities of the Hong Kong branchare included in the amounts of Asian life assurance subsidiaries.

(ii) Excluding PAC shareholders’ equity that are included in ‘parent company and shareholders’ equity of other subsidiaries andfunds’.

(iii) The term shareholders’ equity held in long-term funds refers to the excess of assets over liabilities attributable to shareholdersof funds which are required by law to be maintained with segregated assets and liabilities.

(iv) For regulatory purposes the Jackson surplus notes are accounted for as capital.

(v) Other adjustments to shareholders’ equity and unallocated surplus include amounts for the value of non-participating businessfor UK regulated with-profits funds, deferred tax, admissibility and other items measured differently on the regulatory basis.For 2006 the other adjustments for UK regulated with-profits funds included inadmissible assets of the WPSF of£(256) million. For Jackson the principal reconciling item is deferred tax related to deferred acquisition costs of £675 million(2006: £599 million).

(vi) Insurance business accounted for as financial instruments under IAS 39.

(vii) In determining the IAS 19 adjustment for the purposes of this table the surplus (deficit) in the Group’s main pension schemeused for the calculation includes amounts for investments in Prudential insurance policies (see note 11).

(b) Basis of preparation, capital requirements and management

Each of the Group’s long-term business operations is capitalized to a sufficiently strong level for itsindividual circumstances. Details by the Group’s major operations are shown below.

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D: Life assurance business (Continued)

(i) UK insurance operations

The FSA rules which govern the Prudential regulation of insurance form part of the PrudentialSourcebook for Insurers, the General Prudential Sourcebook and Interim Prudential Sourcebook forInsurers. Overall, the net requirements of the General Prudential Sourcebook are intended to align thecapital adequacy requirements for insurance business more closely with those of banking and investmentfirms and building societies, for example, by addressing tiers of capital, rather than looking at netadmissible assets. An insurer must hold capital resources equal at least to the Minimum CapitalRequirement (MCR).

The Prudential Sourcebook for Insurers also contains rules on Individual Capital Assessments. Underthese rules and the rules of the General Prudential Sourcebook all insurers must assess for themselvesthe amount of capital needed to back their business. If the FSA views the results of this assessment asinsufficient, it may draw up its own Individual Capital Guidance for a firm, which can be superimposedas a requirement.

PAC WPSF and SAIF

Under FSA rules, insurers with with-profits liabilities of more than £500 million must hold capitalequal to the higher of the MCR and the Enhanced Capital Requirement (ECR). The ECR is intended toprovide a more risk responsive and ‘realistic’ measure of a with-profit insurer’s capital requirements,whereas the MCR is broadly speaking equivalent to the previous required minimum margin under theInterim Prudential Sourcebook and satisfies the minimum EU Standards.

Determination of the ECR involves the comparison of two separate measurements of the firm’sresources requirement, which the FSA refers to as the ‘twin peaks’ approach.

The two separate peaks are:

(i) the requirement comprised by the mathematical reserves plus the ‘Long-Term Insurance CapitalRequirement’ (LTICR), together known as the ‘regulatory peak’; and

(ii) a calculation of the ‘realistic’ present value of the insurer’s expected future contractual liabilitiestogether with projected ‘fair’ discretionary bonuses to policyholders, plus a risk capital margin,together known as the ‘realistic peak’.

Available capital of the WPSF and SAIF of £8.7 billion (2006: £8.7 billion) represents the excess ofassets over liabilities on the FSA realistic basis. Unlike the previously discussed FRS 27 basis, realisticliabilities on the regulatory basis include the shareholders’ share of future bonuses. These amounts areshown before deduction of the risk capital margin (RCM) which is estimated to be £2.0 billion atDecember 31, 2007 (2006: £1.9 billion).

The FSA’s basis of setting the RCM is to target a level broadly equivalent to a Standard & Poor’scredit rating of BBB and to judge this by ensuring there are sufficient assets to absorb a 1 in 200 yearevent. The RCM calculation achieves this by setting rules for the determination of margins to coverdefined stress changes in asset values and yields for market risk, credit risk and termination risk forwith-profits policies.

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December 31, 2007

D: Life assurance business (Continued)

As noted in section D2(e)(ii), PAC has discretion in its management actions in the case of adverseinvestment conditions. Management actions encompass, but are not confined to, investment allocationdecisions, levels of reversionary bonuses, crediting rates and total claim values. To illustrate the flexibilityof management actions, rates of regular bonus are determined for each type of policy primarily bytargeting them at a prudent proportion of the long-term expected future investment return on theunderlying assets. The expected future investment return is reduced as appropriate for each type ofpolicy to allow for items such as expenses, charges, tax and shareholders’ transfers. However, the ratesdeclared may differ by product type, or by date of payment of the premiums or date of issue of thepolicy, if the accumulated annual bonuses are particularly high or low relative to a prudent proportion ofthe achieved investment return.

When target bonus levels change, the PAC board has regard to the overall financial strength of thelong-term fund when determining the length of time over which it will seek to achieve the amendedproduct target bonus level.

In normal investment conditions, PAC expects changes to regular bonus rates to be gradual overtime and changes are not expected to exceed one per cent per annum over any year. However,discretion is retained as to whether or not a regular bonus is declared each year, and there is no limit onthe amount by which regular bonus rates can be changed.

As regards smoothing of maturity and death benefits, in normal circumstances PAC does not expectmost pay-out values on policies of the same duration to change by more than 10 per cent up or downfrom one year to the next, although some larger changes may occur to balance pay-out values betweendifferent policies. Greater flexibility may be required in certain circumstances, for example following asignificant rise or fall in market values (either sudden or over a period of years) and in such situationsthe PAC board may decide to vary the standard bonus smoothing limits to protect the overall interestsof policyholders.

For surrender benefits, any substantial fall in the market value of the assets of the with-profitssub-fund would lead to immediate changes in the application of MVRs for accumulating with-profitspolicies, firstly to increase the size of MVRs already being applied and, secondly, to extend the range ofpolicies for which an MVR is applied.

Other UK life assurance subsidiaries and funds

The available capital of £982 million (2006: £903 million) reflects the excess of regulatory basisassets over liabilities of the subsidiaries and funds, before deduction of the capital resourcesrequirement of £841 million (2006: £809 million).

The capital resources requirement for these companies broadly reflects a formula which, for activefunds, equates to a percentage of regulatory reserves plus a percentage of death strains.

(ii) Jackson

The regulatory framework for Jackson is governed by the requirements of the US NAIC approvedrisk-based capital standards. Under these requirements life insurance companies report on a formula-based capital standard that they calculate by applying factors to various asset, premium and reserve

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D: Life assurance business (Continued)

items. The formula takes into account the risk characteristics of a company, including asset risk,insurance risk, interest rate risk and business risk.

The available capital of Jackson shown above of £2,251 million (2006: £2,083 million) reflects USregulatory basis assets less liabilities excluding asset valuation reserves. The asset valuation reserve isdesigned to provide for future credit-related losses on debt securities and losses on equity investments.Available capital includes a reduction for the effect of the interest maintenance reserve, which isdesigned by state regulators to defer recognition of non-credit related realized capital gains and lossesand to recognize them rateably in the future.

Jackson’s risk-based capital ratio is significantly in excess of regulatory requirements.

(iii) Asian operations

The available capital shown above of £629 million (2006: £566 million) represents the excess of localregulatory basis assets over liabilities before deduction of required capital of £265 million (2006:£211 million). These amounts have been determined applying the local regulations in each of theoperations.

The businesses in Asia are subject to local capital requirements in the jurisdictions in which theyoperate. The Hong Kong business branch of PAC and its capital requirements are subsumed within thoseof the PAC long-term fund. For the other material Asian operations, the details of the basis ofdetermining regulatory capital and regulatory capital requirements are as follows:

Singapore

In Singapore a risk based regulatory framework applies rather than one based on a net premiumapproach.

For participating business, a gross premium reserve, determined using prudent best estimateassumptions and which makes allowance for future bonus, is held. The amount held is subject to aminimum of the higher of the assets attributed to participating business and a gross premium reservecalculated on specified assumptions, but without allowance for future bonus, that include prescribedprovisions for adverse deviations (PADs).

For non-participating business, gross premium reserves are held. For linked business the value ofunits is held together with a non-unit reserve calculated in accordance with standard actuarialmethodology.

Taiwan

Basic policy reserves are determined using a net premium method. Both mortality and interest ratesare specified. For more recent issues, the valuation rate of interest has been linked to the prevailingmarket rate on 10-year government bonds.

Solvency capital is determined using a risk-based capital approach.

Japan

Mathematical reserves for traditional business are determined on a net premium basis usingprescribed mortality and interest rates. Interest rates reflect the original pricing assumptions.

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D: Life assurance business (Continued)

For linked business the value of units is held together with a non-unit reserve calculated inaccordance with standard actuarial methodology.

With regard to solvency, the adjusted solvency capital assets of the Company must exceed 200 percent of the risk related capital requirement value at risk. It is thus a risk-based capital approach.

Malaysia

Mathematical reserves for traditional business are determined on a modified net premium basisusing prescribed mortality and interest rates (no higher than four per cent).

For linked business the value of units is held together with a non-unit reserve calculated inaccordance with standard actuarial methodology.

The capital requirement is determined as four per cent of reserves plus a specified percentage ofsums at risk. There is an overriding minimum capital requirement of 100 million Malaysian Ringgit.

Vietnam

Mathematical reserves are calculated using a modified net premium approach, using a stable set ofassumptions agreed with the regulator.

The capital requirement is determined as four per cent of reserves plus a specified percentage ofsums at risk of 0.1 per cent of sums at risk for policies with original term less than or equal to five yearsor 0.3 per cent of sums at risk for policies with original term more than five years.

Korea

Policy reserves for traditional business are determined on net premium reserve basis using pricingmortality and prescribed standard interest rates.

For linked business, the value of units is held together with the non-unit reserves calculated inaccordance with regulatory standard actuarial methodology.

The capital requirement in Korea is determined as four per cent of the policy reserves and expectedclaims after reinsurance. Insurance companies in Korea are expected to maintain a level of free surplusin excess of the capital requirements with the usual level of solvency margin being around 200 per centof the required capital.

(iv) Group capital requirements

In addition to the requirements at individual company level, FSA requirements under the IGD applyadditional prudential requirements for the Group as a whole. Previously, whilst the Group owned Egg, itwas required to comply with the broadly equivalent requirements of the FCD. Discussion of the Group’sIGD position at December 31, 2007 is provided in section C. During 2007, Prudential met the ‘hard test’of the FSA under both the FCD and IGD. At December 31, 2007, Prudential met the requirements ofthe IGD.

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(c) Movements in total available capital

Total available capital for the Group’s life assurance operations has changed during 2007 as follows:

Other UKlife

assurancesubsidiaries Asian life

WPSF and funds Jackson assurance Group2007 (note i) (note iii) (note ii) subsidiaries total

£ million £ million £ million £ million £ million

Available capital at December 31, 2006 . . 8,688 903 2,083 566 12,240Changes in assumptions . . . . . . . . . . . . . . . (335) (33) — 4 (364)Changes in management policy . . . . . . . . . . — — — 12 12Changes in regulatory requirements . . . . . . . — — (7) — (7)New business and other factors . . . . . . . . . . 367 112 175 47 701

Available capital at December 31, 2007 . . 8,720 982 2,251 629 12,582

Detail on the movement for 2006 is as follows:

Other UKlife

assurancesubsidiaries Asian life

WPSF and funds Jackson assurance Group2006 (note i) (note iii) (note ii) subsidiaries total

£ million £ million £ million £ million £ million

Available capital at December 31, 2005 . . . . . 7,979 759 2,257 570 11,565Changes in assumptions . . . . . . . . . . . . . . . 61 (3) — (2) 56Changes in management policy . . . . . . . . . . — — — — —Changes in regulatory requirements . . . . . . . — 80 — — 80New business and other factors . . . . . . . . . . 648 67 (174) (2) 539

Available capital at December 31, 2006 . . . . . 8,688 903 2,083 566 12,240

Notes

(i) WPSFThe increase in 2007 reflects investment return earned on the opening available capital partially offset by the £335 millioneffect of assumption changes and a £214 million impact from a change in the risk-free yield curve which affects the outlookfor future investment returns. The £335 million effect of assumption changes on a regulatory basis compares to the£392 million effect of change in assumptions on an IFRS basis as shown in note D2(g).

The £648 million increase in available capital in 2006 for new business and other factors incorporates the effects of thestrong investment returns in 2006 and the improved outlook for future investment returns at that time.

(ii) JacksonThe increase of £168 million in 2007 reflects an underlying increase of £203 million (applying the 2007 year end exchangerate of 1.99) and £35 million of exchange translation loss.

The decrease of £174 million in 2006 reflected an underlying increase of £100 million (applying the 2006 year end exchangerate of 1.96) and £274 million of exchange translation loss.

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December 31, 2007

D: Life assurance business (Continued)

(iii) Other UK life assurance subsidiaries and fundsThe effect from the changes in assumptions of valuation interest rates on insurance liabilities is broadly matched by thecorresponding effect on assets leaving no significant impact on the available capital.

The increase in available capital in 2006 from changes in regulatory requirements of £80 million was primarily due toregulatory changes for UK regulated shareholder-backed non-participating business from the FSA’s policy statement PS06/14confirmed in December 2006. The changes allowed liabilities for this business to incorporate more economic realism.Additional details are shown in note D2.

(d) Transferability of available capital

For PAC and all other UK long-term insurers, long-term business assets and liabilities must, by law,be maintained in funds separate from those for the assets and liabilities attributable to non-life insurancebusiness or to shareholders. Only the ‘established surplus’—the excess of assets over liabilities in thelong-term fund determined through a formal valuation—may be transferred so as to be available forother purposes. Distributions from the with-profits sub-fund to shareholders reflect the shareholders’one-ninth share of the cost of declared policyholders’ bonuses.

Accordingly, the excess of assets over liabilities of the PAC long-term fund is retained within thatcompany. The retention of the capital enables it to support with-profits and other business of the fundby, for example, providing the benefits associated with smoothing and guarantees. It also providesinvestment flexibility for the fund’s assets by meeting the regulatory capital requirements thatdemonstrate solvency and by absorbing the costs of significant events or fundamental changes in itslong-term business without affecting the bonus and investment policies.

For other UK long-term business subsidiaries, the amounts retained within the companies are atlevels which provide an appropriate level of capital strength in excess of the regulatory minimum.

For Jackson, capital retention is maintained at a level consistent with an appropriate rating byStandard & Poor’s. Currently Jackson is rated AA. Jackson can pay dividends on its capital stock only outof earned surplus unless prior regulatory approval is obtained. Furthermore, dividends which exceed thegreater of 10 per cent of Jackson’s statutory surplus or statutory net gain from operations for the prioryear require prior regulatory approval.

For Asian subsidiaries, the amounts retained within the companies are at levels that provide anappropriate level of capital strength in excess of the local regulatory minimum. For ring-fencedwith-profits funds, the excess of assets over liabilities is retained with distribution tied to theshareholders’ share of bonuses through declaration of actuarially determined surplus.

The Singapore and Malaysian businesses may, in general, remit dividends to the UK, provided thestatutory insurance fund meets the capital adequacy standard required under local statutory regulations.

Available capital of the non-insurance business units is transferable to the life assurance businessesafter taking account of an appropriate level of operating capital, based on local regulatory solvencytargets, over and above basis liabilities. The economic capital model described in section D1(concentration of risks) takes into account restrictions on mobility of capital across the Group withcapital transfers to and from business units triggered at a solvency level consistent with these targets.The model takes into account restrictions on the availability to the Group of the estate of the variouswith-profits funds throughout the Group.

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Notes to the Consolidated Financial Statements

December 31, 2007

D: Life assurance business (Continued)

(e) Sensitivity of liabilities and total capital to changed market conditions and capitalmanagement policies

Prudential manages its assets, liabilities and capital locally, in accordance with local regulatoryrequirements and reflecting the different types of liabilities Prudential has in each business. As a resultof the diversity of products offered by Prudential and the different regulatory requirements in which itoperates, Prudential employs differing methods of asset/liability and capital management, depending onthe business concerned.

Stochastic modeling of assets and liabilities is undertaken in the UK, Jackson and Asia to assess theeconomic capital requirements under different confidence intervals and time horizons. In addition,reserve adequacy testing under a range of scenarios and dynamic solvency testing is carried out,including under certain scenarios mandated by the UK, the US and Asian regulators.

A stochastic approach models the inter-relationship between asset and liability movements, takinginto account asset correlation, management actions and policyholder behavior under a large number ofalternative economic scenarios. These scenarios are projected forward over a period of time, typically25 years or longer, and the liabilities and solvency position of the fund are calculated in each scenario ineach future year. The fund’s policy on management actions, including bonus and investment policy,continue to be set in order that they are consistent with the available capital and the targeted risk ofdefault.

The sensitivity of liabilities and other components of total capital vary depending upon the type ofbusiness concerned and this conditions the approach to asset/liability management.

For example, for businesses that are most sensitive to interest rate changes, such as immediateannuity business, Prudential uses cash flow analysis to create a portfolio of debt securities whose valuechanges in line with the value of liabilities when interest rates change. This type of analysis helpsprotect profits from changing interest rates. This type of analysis is used in the UK for annuity businessand by Jackson for its interest-sensitive and fixed indexed annuities and stable value products.

For businesses that are most sensitive to equity price changes, Prudential uses stochastic modelingand scenario testing to look at the future returns on its investments under different scenarios which bestreflect the large diversity in returns that equities can produce. This allows Prudential to devise aninvestment and with-profits policyholder bonus strategy that, on the model assumptions, allows it tooptimize returns to its policyholders and shareholders over time while maintaining appropriate financialstrength. Prudential uses this methodology extensively in connection with its UK with-profits business.

(f) Intra-group arrangements in respect of SAIF

Should the assets of SAIF be inadequate to meet the guaranteed benefit obligations to thepolicyholders of SAIF, the PAC long-term fund would be liable to cover any such deficiency.

Due to the quality and diversity of the assets in SAIF and the ability of SAIF to revise guaranteedbenefits in the event of an asset shortfall, the directors believe that the probability of either the PAClong-term fund or the Group’s shareholders’ funds, under their obligation to maintain the capital positionof long-term funds generally, having to contribute to SAIF is remote.

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Notes to the Consolidated Financial Statements

December 31, 2007

E: Asset management (including US broker-dealer) and other operations

The Group’s asset management operations are based in the UK, Asia and the US where they operatedifferent models and under different brands tailored to their markets.

Asset management in the UK is undertaken through M&G which is made up of three distinctbusinesses, being Retail, Wholesale and Finance, and whose operations include retail asset management,institutional fixed income, pooled life and pension funds, property and private finance. M&G alsomanage the Group’s balance sheet.

Asset management in Asia serves both the life companies in Asia by managing the life funds andfunds underlying the investment linked products and third party customers through mutual fundbusiness. Asia offers mutual fund investment products in a number of countries within the region,allowing customers to participate in debt, equity and money market investments.

Asset management in the US is undertaken through PPM America which manages assets for theGroup’s US, UK and Asian affiliates plus also provides investment services to other affiliated andunaffiliated institutional clients including CDOs, private investment funds, institutional accounts andmutual funds. In addition, broker-dealer activities are undertaken in the US where trades in securitiesare carried out for both third party customers and for its own account.

Other operations covers unallocated corporate activities and includes the head office functions.

E1: Income statement for asset management operations

The profit included in the income statement in respect of asset management operations for the yearis as follows:

2007 2006 2005Asset management operations M&G US Asia Total Total Total

£ million £ million £ million £ million £ million £ million

Revenue . . . . . . . . . . . . . . . . . . . . . . 810 386 201 1,397 1,080 895Charges . . . . . . . . . . . . . . . . . . . . . . (547) (377) (129) (1,053) (797) (741)

Profit before tax . . . . . . . . . . . . . . . 263 9 72 344 283 154

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Notes to the Consolidated Financial Statements

December 31, 2007

E: Asset management (including US broker-dealer) and other operations (Continued)

E2: Balance sheet for asset management operations

Assets, liabilities and shareholders’ funds included in the Group consolidated balance sheet inrespect of asset management operations are as follows:

2007 2006Asset management operations M&G US Asia Total Total

£ million £ million £ million £ million £ million

AssetsIntangible assets:

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,153 16 61 1,230 1,230Deferred acquisition costs . . . . . . . . . . . . . . . . 6 — — 6 6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,159 16 61 1,236 1,236

Other non-investment and non-cash assets . . . . . . 304 132 85 521 415Investment properties . . . . . . . . . . . . . . . . . . . — — — — 1Financial investments:

Loans (note i) . . . . . . . . . . . . . . . . . . . . . . 2,334 — — 2,334 2,181Equity securities and portfolio holdings in unit

trusts . . . . . . . . . . . . . . . . . . . . . . . . . . 11 — 6 17 13Debt securities (note ii) . . . . . . . . . . . . . . . . 857 — 25 882 678Other investments . . . . . . . . . . . . . . . . . . . 132 19 4 155 80Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . — 15 11 26 10

Total investments . . . . . . . . . . . . . . . . . . . . . . . 3,334 34 46 3,414 2,963Cash and cash equivalents (note iii) . . . . . . . . . . . 1,751 33 56 1,840 951

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . 6,548 215 248 7,011 5,565

Equity and liabilitiesEquityShareholders’ equity . . . . . . . . . . . . . . . . . . . . . 1,424 81 172 1,677 1,590Minority interests . . . . . . . . . . . . . . . . . . . . . . . 52 — — 52 52

Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,476 81 172 1,729 1,642

LiabilitiesIntra Group debt represented by operational

borrowings at Group level (note iv) . . . . . . . . . . 2,477 — — 2,477 2,032Net asset value attributable to external holders of

consolidated funds (note iii) . . . . . . . . . . . . . . . 1,234 — — 1,234 513Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 1,361 134 76 1,571 1,378

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 5,072 134 76 5,282 3,923

Total equity and liabilities . . . . . . . . . . . . . . . . 6,548 215 248 7,011 5,565

Notes

(i) LoansThe M&G loans of £2,334 million comprise £1,383 million of bridging loan finance assets and £951 million in respect of astructured finance arrangement, both managed by Prudential Capital. The bridging loan finance assets generally have noexternal credit ratings available, with internal ratings prepared by the Group’s asset management operations as part of the risk

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December 31, 2007

E: Asset management (including US broker-dealer) and other operations (Continued)

management process rating £738 million BBB+ to BBB- and £645 million BB+ to BB-. Of the loans receivable under thestructured finance arrangement, £826 million of the receivable was with counterparties rated AA by Standard and Poor’s and£125 million AA-. In addition a AAA rated credit default swap was held covering £400 million of the AA rated element of theloans.

(ii) Debt securitiesOf the debt securities of £857 million for M&G at December 31, 2007, £278 million were rated AAA by Standard and Poor’s,£6 million AA+, £42 million AA, £271 million AA-, £162 million A+, £7 million A and £29 million A-. Of the £62 million whichwas not rated by Standard and Poor’s £46 million was rated Aaa by Moody’s.

(iii) Consolidated investment fundsThe M&G balance sheet shown above includes investment funds which are managed on behalf of third parties and that areconsolidated under IFRS in recognition of the control arrangements for the funds. The balance sheet includes cash and cashequivalents of £1,253 million, £(19) million of other net assets and liabilities and the net asset value attributable to externalunit holders of £1,234 million in respect of these funds, which are non-recourse to M&G and the Group.

(iv) Intra Group debt represented by operational borrowings at Group levelOperational borrowings for M&G are in respect of Prudential Capital’s short-term fixed income security programme andcomprise £2,422 million of commercial paper and £55 million of medium-term notes.

E3: Regulatory capital positions

Asset management operations in the UK, Hong Kong, Singapore, Vietnam and China are subject toregulatory requirements based on fixed operating expenses and other operating considerations. Themovement in the year of the surplus regulatory capital position of these operations, combined with themovement in the IFRS basis shareholders’ funds for other asset management operations, is as follows:

Asset management operations

2007 2006Capital surplus position M&G US Asia Total Total

£ million £ million £ million £ million £ million

Beginning of year . . . . . . . . . . . . . . . . . . . . . . . 114 57 72 243 311Exchange movement . . . . . . . . . . . . . . . . . . . . . — (1) — (1) (15)Movement in capital requirement . . . . . . . . . . . . . (6) — (3) (9) (26)Gains during the year . . . . . . . . . . . . . . . . . . . . 105 25 59 189 172Distributions made . . . . . . . . . . . . . . . . . . . . . . (114) — (36) (150) (199)

End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 81 92 272 243

The movement in the year reflects changes in regulatory requirements whilst gains are driven byprofits generated during the year. Distributions consist of dividends paid up to the parent company.

E4: Sensitivity of profit and equity to market and other financial risk

(i) Currency translation

Consistent with the Group’s accounting policies, the profits of the Asia and PPM America assetmanagement operations are translated at average exchange rates and shareholders’ equity at the closingrate for the reporting period. For 2007, the rates for the most significant operations are given innote B3.

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Notes to the Consolidated Financial Statements

December 31, 2007

E: Asset management (including US broker-dealer) and other operations (Continued)

A 10 per cent increase in these rates and those of other Asian operations would have reducedreported profit before tax attributable to shareholders and shareholders’ equity, excluding goodwillattributable to Asia and PPM America asset management operations, by £7 million (2006: £14 million)and £18 million (2006: £19 million) respectively.

(ii) Other sensitivities to other financial risks for asset management operations

The principal sensitivities to other financial risk of asset management operations are credit risk onthe bridging loan portfolio (as described in note E2) of M&G’s Prudential Capital operation and theindirect effect of changes to market values of funds under management. Due to the nature of the assetmanagement operations there is limited direct sensitivity to movements in interest rates. Total debtsecurities held at December 31, 2007 by asset management operations were £882 million (2006:£678 million), the majority of which are held by the Prudential Capital operation of M&G. Debtsecurities held by M&G are in general variable rate bonds and so market value is limited in sensitivity tointerest rate movements and consequently any change in interest rates would not have a material impacton profit or shareholder’s equity. Asset management operations do not hold significant investments inproperty or equities.

E5: Other operations

Other operations consist of unallocated corporate activities including Group Head Office (GHO) andAsia regional head office, with net income and expenditure for the year of £248 million (2006:£248 million; 2005: £199 million) for other operations. An analysis of assets and liabilities relating toother operations is shown in note B4.

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Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes

F1: Segmental information

The Group’s primary and secondary segments are described in detail in note B4.

Primary segment information

The segment results for the years ended December 31, 2007, 2006 and 2005 are as follows:

2007 2006 2005

£ million £ million £ million

RevenueLong-term business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,555 34,197 39,296Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,397 1,080 895Unallocated corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 38 98Intra group revenue eliminated on consolidation . . . . . . . . . . . . . . . (268) (284) (279)

Total revenue, net of reinsurance per income statement . . . . . . 32,866 35,031 40,010

Charges (before income tax attributable to policyholders andunallocated surplus of long-term insurance funds)

Long-term business, including post-tax transfers to unallocated surplusof with-profits funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,533) (32,162) (36,997)

Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,053) (797) (741)Unallocated corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (363) (135) (450)Intra group charges eliminated on consolidation . . . . . . . . . . . . . . . 268 284 279

Total charges per income statement . . . . . . . . . . . . . . . . . . . . . (31,681) (32,810) (37,909)Segment results—revenue less charges (continuing operations)Long-term business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,022 2,035 2,299Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344 283 154Unallocated corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (181) (97) (352)

Profit before tax* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 2,221 2,101Tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . (19) (849) (1,147)

Profit before tax attributable to shareholders . . . . . . . . . . . . . . . . . 1,166 1,372 954Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . . . . . (382) (392) (242)

Profit from continuing operations after tax . . . . . . . . . . . . . . . . . . . 784 980 712

Segment results—discontinued operationsBanking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 (105) 48

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,025 875 760

* Profit before tax represents income net of post-tax transfers to unallocated surplus of with-profits funds, before taxattributable to policyholders and unallocated surplus of with-profits funds, unit-linked policies and shareholders’ profits.

Within segment results above, the share of post-tax profit of associates that are equity accountedfor of £nil (2006: £1 million; 2005: £nil) is allocated to the discontinued banking segment.

F-131

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

In its capacity as fund manager to fellow Prudential plc subsidiaries, M&G earns fees for assetmanagement and related services. These services are charged at appropriate arm’s length prices,typically priced as a percentage of funds under management.

Total charges include £11,295 million (2006: £12,130 million; 2005: £12,745) of non-cash expensesother than depreciation and amortization mainly relating to changes in technical reserves and pensionactuarial and other gains and losses. The majority of this amount is borne by the long-term businesssegment.

Secondary segment information

Although the Company is UK registered, the Group manages its business on a global basis. Theoperations are based in three main geographical areas: UK, US and Asia.

2007 2006 2005

£ million £ million £ million

RevenueUK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,886 21,212 29,573US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,271 8,562 6,912Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,977 5,541 3,804Intra group revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (268) (284) (279)

Total revenue per income statement . . . . . . . . . . . . . . . . . . . . . 32,866 35,031 40,010

F-132

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

F2: Revenue

2007 2006 2005

£ million £ million £ million

Long-term business premiumsInsurance contract premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,308 13,805 13,583Investment contracts with discretionary participation feature premiums . . 874 1,249 1,366Inwards reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 1,103 276Less: reinsurance premiums ceded . . . . . . . . . . . . . . . . . . . . . . . . . . (171) (171) (197)

Earned premiums, net of reinsurance . . . . . . . . . . . . . . . . . . . . . . . . 18,188 15,986 15,028

Realized and unrealized gains and losses on securities at fair valuethrough profit and loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,630 5,964 14,224

Realized and unrealized gains and losses on derivatives at fair valuethrough profit and loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 932 (68)

Realized gains and losses on available-for-sale securities, previouslyrecognized directly in equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 (7) (22)

Realized gains and losses on loans . . . . . . . . . . . . . . . . . . . . . . . . . . 47 (3) (10)Interest (notes i,ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,857 5,827 5,497Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,730 3,666 2,731Other investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 674 749 768

Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,221 17,128 23,120

Fee income from investment contract business and asset management(note iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,039 886 704

Income from venture investments of the PAC with-profits funds . . . . . . 1,418 1,031 1,158

Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,457 1,917 1,862

Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,866 35,031 40,010

Notes

(i) Interest income is calculated on the effective interest rate method for all financial assets that are not at fair value throughprofit and loss.

(ii) Interest income includes £2 million (2006: £3 million; 2005: £3 million) accrued in respect of impaired securities.

(iii) Fee income includes £31 million (2006: £34 million; 2005 £40 million) relating to financial instruments that are not held at fairvalue through profit and loss. These fees primarily related to prepayment fees, late fees and syndication fees.

F-133

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

F3: Acquisition costs and other operating expenditure

2007 2006 2005

£ million £ million £ million

Acquisition costs (notes i,ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,030 1,238 1,413Staff and pension costs (note I1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,070 647 886Administrative and operating costs (note iii) . . . . . . . . . . . . . . . . . . . . 2,423 2,327 2,215

Total acquisition costs and other operating expenditure . . . . . . . . 4,523 4,212 4,514

Notes

(i) Acquisition costs in 2007 comprise amounts related to insurance contracts of £939 million (2006: £1,165 million; 2005:£1,307 million), and investment contracts and asset management contracts of £91 million (2006: £73 million; 2005:£106 million). These costs include amortization of £410 million (2006: £299 million; 2005: £392 million) and £3 million (2006:£6 million; 2005: £9 million) respectively.

(ii) Acquisition costs also include fee expenses relating to financial liabilities held at amortized costs of £1 million (2006:£2 million; 2005: £2 million). These expenses primarily related to fees incurred on Jackson’s investment contract liabilities(GICs and annuity certain contracts).

(iii) Administrative and operating costs include total depreciation and amortization expense amounting to £523 million (2006:£472 million; 2005: £513 million). Of this amount, £413 million (2006: £305 million; 2005: £401 million) relates toamortization of deferred acquisition costs of insurance contracts and asset management contracts, which is primarily borne bythe long-term business segment. Of the remainder of the depreciation and amortization charge of £110 million (2006:£167 million; 2005: £112 million), £98 million (2006: £156 million; 2005: £101 million) relates to long-term business,£8 million (2006: £8 million: 2005: £8 million) to asset management and £4 million (2006: £3 million; 2005: £3 million) toother operations.

F4: Finance costs: Interest on core structural borrowings of shareholder-financed operations

Finance costs consist of £158 million (2006: £166 million; 2005: £164 million) interest on core debtof central companies and £10 million (2006: £11 million; 2005: £11 million) on US operations’ surplusnotes.

F-134

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

F5: Tax

(a) Total tax expense by nature of expense

An analysis of the total tax expense of continuing operations recognized in the income statement bynature of expense (benefit) is as follows:

2007 2006 2005

£ million £ million £ million

Current tax expense:Corporation tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 806 688 705Adjustments in respect of prior years . . . . . . . . . . . . . . . . . . . . . . (185) (34) (191)Benefit from a previously unrecognized tax loss, tax credit or

temporary difference from a prior period . . . . . . . . . . . . . . . . . . — — (2)

Total current tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621 654 512

Deferred tax arising from:Origination and reversal of temporary differences . . . . . . . . . . . . . . (170) 556 870(Benefit) expense from a previously unrecognized tax loss, tax credit

or temporary difference from a prior period . . . . . . . . . . . . . . . . . (50) 31 5Write-down or reversal of a previous write-down of a deferred tax

asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2

Total deferred tax (credit) expense . . . . . . . . . . . . . . . . . . . . . . . . (220) 587 877

Total tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 1,241 1,389

The total tax expense arises as follows:2007 2006 2005

£ million £ million £ million

Current tax expense:UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377 381 340Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 273 172

621 654 512

Deferred tax (credit) expense:UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (297) 317 780Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 270 97

(220) 587 877

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 1,241 1,389

F-135

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

The total deferred tax (credit) expense arises as follows:2007 2006 2005

£ million £ million £ million

Unrealized gains and losses on investments . . . . . . . . . . . . . . . . . . . . (225) 236 599Short-term timing differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 156 266Capital allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 2 10Balances relating to investment and insurance contracts . . . . . . . . . . . . (41) 198 3Unused tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12) (5) (1)

Deferred tax (credit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (220) 587 877

In April 2008 the standard corporation tax rate for the UK will change from 30% to 28%. Deferredtax at the end of 2007 for UK operations has been provided at the new rate of 28 per cent on the basisthat materially all of the temporary differences are expected to reverse once the new rate has takeneffect. The effect on the deferred tax assets and liabilities at December 31, 2007 was £20 million.

In 2007, a deferred tax credit of £54 million (2006: £41 million; 2005: £93 million) has been takendirectly to reserves. Other movements in deferred tax totalling £46 million credit mainly comprise offoreign exchange losses and as a result of the disposal of operations. When these amounts are takenwith the deferred tax credit shown above, the result is a decrease of £320 million in the Group’s netdeferred tax liability (2006: increase of £546 million; 2005: increase of £784 million).

In 2007, there is a tax credit of £19 million relating to discontinued banking operations (2006:£45 million; 2005: £1 million) (see note J1).

(b) Reconciliation of effective tax rate

The total tax expense is attributable to shareholders and policyholders as summarized in the incomestatement.

(i) Summary of pre-tax profit and tax charge

The income statement includes the following items:2007 2006 2005

£ million £ million £ million

Profit before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,185 2,221 2,101Tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . . . . . . (19) (849) (1,147)

Profit before tax attributable to shareholders . . . . . . . . . . . . . . . . . . . 1,166 1,372 954Tax attributable to shareholders’ profits:

Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (401) (1,241) (1,389)Less: tax attributable to policyholders’ returns . . . . . . . . . . . . . . . . . 19 849 1,147

Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . . . . . . . (382) (392) (242)

Profit from continuing operations after tax . . . . . . . . . . . . . . . . . . . . . 784 980 712

F-136

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

(ii) Overview

For the purposes of explaining the relationship between tax expense and accounting profit, it isappropriate to consider the sources of profit and tax by reference to those that are attributable toshareholders and policyholders, as follows:

2007 2006 2005

Attributable Attributable Attributable Attributable Attributable Attributableto to to to to to

shareholders policyholders* Total shareholders policyholders* Total shareholders policyholders Total

£ million £ million £ million £ million £ million £ million £ million £ million £ millionProfit before tax . 1,166 19 1,185 1,372 849 2,221 954 1,147 2,101Taxation charge:

Expected taxrate . . . . . 31% 100% 32% 30% 100% 57% 36% 100% 71%

Expected taxcharge . . . (356) (19) (375) (418) (849) (1,267) (340) (1,147) (1,487)

Variance fromexpected taxcharge(note v(ii)) . . (26) — (26) 26 — 26 98 — 98

Actual taxcharge . . . (382) (19) (401) (392) (849) (1,241) (242) (1,147) (1,389)

Average effectivetax rate . . . . 33% 100% 34% 29% 100% 56% 25% 100% 66%

* For the column entitled ‘Attributable to policyholders’, the profit before tax represents income, net of post-tax transfers to unallocated surplus of with-profits funds,before tax attributable to policyholders and unallocated surplus of with-profits funds and unit-linked policies.

Due to the requirements of the financial reporting standards IAS 1 and IAS 12, the profit before taxand tax charge reflect the aggregate of amounts that are attributable to shareholders and policyholders.

Profit before tax comprises profit attributable to shareholders and pre-tax profit attributable topolicyholders of linked and with-profits funds and unallocated surplus of with-profits funds.

The total tax charge for linked and with-profits business includes tax expense on unit-linked andwith-profits funds attributable to policyholders, the unallocated surplus of with-profits funds and theshareholders’ profits. This feature arises from the basis of taxation applied to life and pension business,principally in the UK, but with similar bases applying in certain Asian operations, and is explained innote (iii) below.

Furthermore, the basis of preparation of Prudential’s financial statements incorporates the additionalfeature that, as permitted under IFRS 4, the residual equity of the Group’s with-profits funds,i.e. unallocated surplus, is recorded as a liability with transfers to and from that liability reflected inpre-tax profits. This gives rise to anomalous effective tax rates for profits attributable to policyholders(as described in note (iv) below).

In meeting the reconciliation requirements set out in paragraph 81I of IAS 12, the presentationshown in this disclosure note seeks to ensure that the explanation of the relationship between taxexpense and accounting profit draw properly the distinction between the elements of the profit and taxcharge that are attributable to policyholders and shareholders as explained below in notes (iv) and(v) respectively. Due to the nature of the basis of taxation of UK life and pension business (as describedin note (iii) below), and the significance of the results of the business to the Group, it is inappropriate toseek to explain the effective tax rate on profit before tax by traditional approach that would apply forother industries.

F-137

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

The shareholder elements are the components of the profit and tax charge that are of most directrelevance to investors, and it is this aspect that the IAS 12 requirement is seeking to explain forcompanies that do not need to account for both with-profits and unit-linked funds, where tax is borneby the Company on the policyholders’ behalf and which is not contemplated by IFRS requirement.

(iii) Basis of taxation for UK life and pension business

Different rules apply under UK tax law for taxing pension business and life insurance business andthere are detailed rules for apportioning the investment return and profits of the fund between thetypes of business.

The investment return referable to pension business, and some other less significant classes ofbusiness, is exempt from taxation, but tax is charged on the profit that shareholders derive from writingsuch business at the corporate rate of tax. The rules for taxing life insurance business are morecomplex. Initially, the UK regime seeks to tax the regulatory basis investment return less managementexpenses (I-E) on this business as it arises. However, in determining the actual tax charge, a calculationof the shareholder profits for taxation purposes from writing life insurance business also has to be madeand compared with the I-E profit.

If the shareholder profit is higher than the I-E amount, then relief for expenses in the I-E calculationhas to be restricted until the I-E profit equals the shareholder profit. If on the other hand, the I-E profitis the greater, then an amount equal to the shareholder profit is taxed at the corporate rate of tax, withthe remainder of the I-E profit being taxed at the lower policyholder rate of tax.

The purpose of this approach is to ensure that the Company is always as a minimum taxed on theprofit, as defined for taxation purposes by reference to the Company’s regulatory returns (rather thanIFRS basis results), that it has earned. The shareholders’ portion of the long-term business is taxed atthe shareholders’ rate, with the remaining portion taxed at rates applicable to the policyholders.

It is to be noted that the calculations described are determined using data from the regulatory basisreturns rather than the IFRS basis results. The differences between the regulatory and accounting basesare very significant and extremely complex rendering any explanation in general purpose financialstatements to be of little if any use to users.

(iv) Profits attributable to policyholders and related tax

As noted above, it is necessary under IFRS requirements to include the total tax charge of theCompany (both policyholder and shareholder elements) in the tax charge disclosed in the incomestatement.

For with-profits business, total pre-tax profits reflect the aggregate of profits attributable topolicyholders and shareholders. However, amounts attributable to the equity of with-profits funds arecarried in the liability for unallocated surplus. Also, as described in note (iii), UK with-profits business istaxed on a basis that affects policyholders’ unallocated surplus of with-profits funds and shareholders.For the PAC with-profits sub-fund, transfers to and from unallocated surplus are recorded in the incomestatement, so that after charging the total tax borne by the fund, the net balance reflects the statutorytransfer from the fund for the year. The statutory transfer represents 10 per cent of the actuariallydetermined surplus for the year that is attributable to shareholders.

F-138

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

For SAIF similar transfers are made. However, in the case of SAIF, a net nil balance is derived,reflecting the lack of shareholder interest in the financial performance of the fund (other than throughasset management arrangements).

The accounting anomaly that arises under IFRS is that due to the fact that the net of tax profitattributable to with-profits policyholders is zero, the Company’s presentation of pre-tax profit attributableto policyholders reflects an amount that is the mirror image of the tax charge attributable topolicyholders.

For unit-linked business, pre-tax profits also reflect the aggregate of profits attributable topolicyholders and shareholders. The pre-tax profits attributable to policyholders represent fees earnedthat are used to pay tax borne by the Company on policyholders’ behalf. The net of tax profitattributable to policyholders for unit-linked business is thus zero.

The combined effect of these features is such that providing a reconciliation of the tax chargeattributable to policyholders to an expected charge based on the standard corporate rate of tax on IFRSbasis profits attributable to policyholders is not relevant.

In summary, for accounting purposes, in all cases and for all reporting periods, the apparenteffective rate for profit attributable to policyholders and unallocated surplus is 100 per cent. However, itis to be noted that the 100 per cent rate does not reflect a rate paid on the profits attributable topolicyholders. It instead reflects the basis of accounting for unallocated surplus coupled with thedistinction made for performance reporting between sources of profit attributable to shareholders,policyholders and unallocated surplus and IFRS requirements in respect of reporting of all pre-tax profitsand all tax charges irrespective of policyholder or shareholder economic interest.

(v) Reconciliation of tax charge on profits attributable to shareholders

AsianUK long-term

insurance business Other2007 operations Jackson operations operations Total

£ million £ million £ million £ million £ million

Profit before tax attributable to shareholders . . 474 426 103 163 1,166Expected tax rate (note i) . . . . . . . . . . . . . . 30% 35% 18% 28% 31%Expected tax charge based on expected tax

rates . . . . . . . . . . . . . . . . . . . . . . . . . . . (142) (149) (19) (46) (356)Variance from expected tax charge (note ii) . . . (27) 23 (29) 7 (26)Actual tax charge . . . . . . . . . . . . . . . . . . . . (169) (126) (48) (39) (382)Actual tax rate . . . . . . . . . . . . . . . . . . . . . . 36% 30% 47% 24% 33%

Notes

(i) Expected tax rates for profit attributable to shareholders:

Expected tax rates shown in the table above reflect the corporate tax rates generally applied to taxable profits of the relevantcountry jurisdictions. For Asian operations the expected tax rates reflect the corporate tax rates weighted by reference to thesource of profits of the operations contributing to the aggregate business result. Expected tax rates for 2007 for Asia arelower than in 2006 due to an increased proportion of profits in low tax jurisdictions. The expected tax rate for other

F-139

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

operations is lower than 2006. The tax rate of 28% reflects the mix of business between UK and overseas operations, whichare taxed at a variety of rates. The rate will fluctuate from year to year dependent on the mix of profits between jurisdictions.

(ii) Variances from expected tax charge for results attributable to shareholders:

For 2007, the principal variances arise from differences between the standard corporation tax rate and actual rates due to anumber of factors, including:

(a) For UK insurance operations, disallowed expenses and prior year adjustments arising from routine revisions of taxreturns;

(b) For Jackson, the benefit of a deduction from taxable income of a proportion of dividends received attributable to thevariable annuity business;

(c) For Asian long-term operations, tax losses in several jurisdictions which are not expected to be available for relief againstfuture profits, and losses on investments in jurisdictions which do not provide corresponding tax relief; and

(d) For other operations, the availability of capital losses brought forward on which no deferred tax had previously beenrecognized, which have been used against capital gains in the period.

AsianUK long-term

insurance business Other2006 operations Jackson operations operations Total

£ million £ million £ million £ million £ million

Profit before tax attributable to shareholders . . 426 451 309 186 1,372Expected tax rate (note i) . . . . . . . . . . . . . . . 30% 35% 25% 30% 31%Expected tax charge based on expected tax

rates . . . . . . . . . . . . . . . . . . . . . . . . . . . (128) (158) (77) (55) (418)Variance from expected tax charge (note ii) . . . 19 8 (5) 4 26Actual tax charge . . . . . . . . . . . . . . . . . . . . (109) (150) (82) (51) (392)Actual tax rate . . . . . . . . . . . . . . . . . . . . . . 26% 33% 27% 27% 29%

Notes

(i) Expected tax rates for profit attributable to shareholders

Expected tax rates shown in the table above reflect the corporate tax rates generally applied to taxable profits of the relevantcountry jurisdictions. For Asian operations the expected tax rates reflect the corporate tax rate weighted by reference to thesource of profits of the operations contributing to the aggregate business result. In 2006, the expected tax rate on totalprofits of 31 per cent is in part due to the Asian long-term business (which is subject to lower tax rates than the UK and US)being a greater proportion of Group results.

(ii) Variances from expected tax charge for results attributable to shareholders

For 2006, the principal variances arise from differences between the standard corporation tax rate and actual rates due to anumber of factors, including:

(a) The tax credit arising from relief for excess expenses in respect of the shareholder-backed protection business.

(b) Prior year adjustments arising from routine revisions of tax returns.

(iii) The results from continuing operations shown above exclude those in respect of discontinued banking operations. On May 1,2007, the Company sold Egg Banking plc. Comparative results for 2006 have been adjusted accordingly from those previouslypublished.

F-140

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

F: Income statement notes (Continued)

AsianUK long-term

insurance business Other2005 operations Jackson operations operations Total

£ million £ million £ million £ million £ million

Profit before tax attributable to shareholders . . 416 526 210 (198) 954Expected tax rate (note i) . . . . . . . . . . . . . . . 30% 35% 26% 12% 36%Expected tax charge/(credit) based on

expected tax rates . . . . . . . . . . . . . . . . . . (125) (184) (54) 23 (340)Variance from expected tax charge/(credit)

(note ii) . . . . . . . . . . . . . . . . . . . . . . . . . (3) 8 (8) 101 98Actual tax charge/(credit) . . . . . . . . . . . . . . (128) (176) (62) 124 (242)Actual tax rate . . . . . . . . . . . . . . . . . . . . . . 31% 33% 30% 63% 25%

Notes

(i) Expected tax rates for profit attributable to shareholders

Expected tax rates shown in the table above reflect the corporate tax rates generally applied to taxable profits of the relevantcountry jurisdictions. For Asian operations the expected tax rates reflect the corporate tax rate weighted by reference to thesource of profits of the operations contributing to the aggregate business result. In 2005, the expected tax rate on totalprofits of 36 per cent was due to the inclusion of a goodwill impairment charge of £120 million which is not allowable for tax.In 2006, no goodwill impairment charge has been booked, and the expected tax rate on total profits of 31 per cent is lower inpart due to this, and additionally due to the Asian long-term business (which is subject to lower tax rates than the UK andUS) being a greater proportion of Group results.

(ii) Variances from expected tax charge for results attributable to shareholders

For 2006, the principal variances arise from differences between the standard corporation tax rate and actual rates due to anumber of factors, including:

(a) The tax credit arising from relief for excess expenses in respect of the shareholder-backed protection business.

(b) Prior year adjustments arising from routine revisions of tax returns.

For 2005, the principal variances arise from differences between the standard corporation tax rate and actual rates for ‘other’operations. This is due to a number of factors including:

(a) The settlement of outstanding issues with HM Revenue and Customs (HMRC) at amounts below those previouslyprovided. The settlements related to a range of issues affecting both shareholder and policyholder taxes. Many of theissues had been in dispute for several years. The principal issues resolved were as follows:

Firstly, HMRC had disputed the deductibility of commissions paid on credit life (protection) insurance. Prudential’streatment of the commissions was consistent with industry practice. At the start of 2005 it looked likely that the disputewould only be settled through litigation. However, it proved possible to negotiate a settlement acceptable to both parties.

Secondly, in 2000 Prudential transferred the insurance business previously carried on by two M&G subsidiaries intoanother subsidiary, Scottish Amicable Life (SAL). In 2002, Prudential transferred the entire business of SAL (including theold M&G business) into Prudential Assurance Company Limited. Both of these transactions were conducted under astatutory framework, which included obtaining High Court approval. The transactions were complex, leading to adifference in views between HMRC and Prudential as to the correct tax treatment of the transactions. These differenceswere resolved through a negotiated settlement.

(b) The tax credit arising from relief for excess expenses in respect of the shareholder-backed protection business.

(c) Prior year adjustments arising from routine revisions of tax returns.

(iii) The results from continuing operations shown above exclude those in respect of discontinued banking operations. On May 1,2007, the Company sold Egg Banking plc. Comparative results for 2005 have been adjusted accordingly from those previouslypublished.

F-141

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities

G1: Financial instruments—designation and fair values

The Group designates all financial assets as either fair value through profit and loss,available-for-sale, or as loans and receivables. Financial liabilities are designated as either fair valuethrough profit and loss or amortized cost, or for investment contracts with discretionary participatingfeatures accounted for under IFRS 4 as described in note A4.

Fair valuethrough Total

profit and Available- Loans and carrying2007 loss for-sale receivables value Fair value

£ million £ million £ million £ million £ million

Financial assetsCash and cash equivalents . . . . . . . . . . — — 4,951 4,951 4,951Deposits . . . . . . . . . . . . . . . . . . . . . — — 7,889 7,889 7,889Equity securities and portfolio holdings

in unit trusts . . . . . . . . . . . . . . . . . 86,157 — — 86,157 86,157Debt securities (note i) . . . . . . . . . . . . 65,349 18,635 — 83,984 83,984Loans (note ii) . . . . . . . . . . . . . . . . . . — — 7,924 7,924 8,105Other investments (note iii) . . . . . . . . . 4,396 — — 4,396 4,396Accrued investment income . . . . . . . . . — — 2,023 2,023 2,023Other debtors . . . . . . . . . . . . . . . . . . — — 1,297 1,297 1,297

155,902 18,635 24,084 198,621

Fair valuethrough Totalprofit Amortized IFRS 4 carrying

2007 and loss cost basis value value Fair value

£ million £ million £ million £ million £ million

Financial liabilitiesCore structural borrowings of shareholder-

financed operations (notes i and H13) . . . . — 2,492 — 2,492 2,476Operational borrowings attributable to

shareholder-financed operations (note H13) . — 3,081 — 3,081 3,081Borrowings attributable to with-profits funds

(note H13) . . . . . . . . . . . . . . . . . . . . . . 204 783 — 987 1,006Obligations under funding, securities lending

and sale and repurchase agreements . . . . . — 4,081 — 4,081 4,100Net asset value attributable to unit holders of

consolidated unit trust and similar funds . . . 3,556 — — 3,556 3,556Investment contracts with discretionary

participating features (note iv) . . . . . . . . . . — — 29,550 29,550 —Investment contracts without discretionary

participating features . . . . . . . . . . . . . . . . 12,110 1,922 — 14,032 14,034Other creditors . . . . . . . . . . . . . . . . . . . . . — 1,020 — 1,020 1,020Other liabilities (including derivatives) . . . . . . 1,081 790 — 1,871 1,871

16,951 14,169 29,550 60,670

F-142

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Fair valuethrough Total

profit and Available- Loans and carrying2006 loss for-sale receivables value Fair value

£ million £ million £ million £ million £ million

Financial assetsCash and cash equivalents . . . . . . . . . . . . — — 5,071 5,071 5,071Deposits . . . . . . . . . . . . . . . . . . . . . . . . — — 7,759 7,759 7,759Equity securities and portfolio holdings in

unit trusts . . . . . . . . . . . . . . . . . . . . . 78,892 — — 78,892 78,892Debt securities (note i) . . . . . . . . . . . . . . 60,208 21,511 — 81,719 81,719Loans (note ii) . . . . . . . . . . . . . . . . . . . . — — 13,754 13,754 14,274Other investments (note iii) . . . . . . . . . . . 3,220 — — 3,220 3,220Accrued investment income . . . . . . . . . . . — — 1,900 1,900 1,900Other debtors . . . . . . . . . . . . . . . . . . . . — — 1,052 1,052 1,052

142,320 21,511 29,536 193,367

Analyzed by:Fair valuethrough Totalprofit Available- Loans and carrying

2006 and loss for-sale receivables value Fair value

£ million £ million £ million £ million £ million

Continuing operations . . . . . . . . . . . . . . . 142,201 19,576 22,434 184,211 184,731Discontinued banking operations . . . . . . . . 119 1,935 7,102 9,156 9,156

142,320 21,511 29,536 193,367

F-143

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Fair valuethrough Totalprofit Amortized IFRS 4 carrying

2006 and loss cost basis value value Fair value

£ million £ million £ million £ million £ million

Financial liabilitiesBanking customer accounts . . . . . . . . . . . . . . — 5,554 — 5,554 5,554Core structural borrowings of shareholder-

financed operations (note i and H13) . . . . . . — 3,063 — 3,063 3,297Operational borrowings attributable to

shareholder-financed operations (note H13) . . — 5,609 — 5,609 5,609Borrowings attributable to with-profits funds

(note H13) . . . . . . . . . . . . . . . . . . . . . . . 553 1,223 — 1,776 1,798Obligations under funding, securities lending

and sale and repurchase agreements . . . . . . — 4,232 — 4,232 4,229Net asset value attributable to unit holders of

consolidated unit trust and similar funds . . . . 2,476 — — 2,476 2,476Investment contracts with discretionary

participating features (note iv) . . . . . . . . . . . — — 28,733 28,733 —Investment contracts without discretionary

participating features . . . . . . . . . . . . . . . . . 11,480 1,562 — 13,042 13,035Other creditors . . . . . . . . . . . . . . . . . . . . . . — 1,398 — 1,398 1,398Other liabilities (including derivatives) . . . . . . . 663 989 — 1,652 1,652

15,172 23,630 28,733 67,535

Analyzed by:Fair valuethrough Totalprofit Amortized IFRS 4 carrying

2006 and loss cost basis value value Fair value

£ million £ million £ million £ £ millionmillion

Continuing operations . . . . . . . . . . . . . . . . . 15,018 14,578 28,733 58,329 29,817Discontinued banking operations . . . . . . . . . . 154 9,052 — 9,206 9,231

15,172 23,630 28,733 67,535

Notes

(i) As at December 31, 2007, £722 million (2006: £624 million) of convertible bonds were included in debt securities and£278 million (2006: £279 million) were included in borrowings.

(ii) Loans and receivables are reported net of allowance for loan losses of £13 million (2006:£14 million).

(iii) See note G3 for details of the derivative assets included. The balance also contains the PAC with-profits fund’s participation invarious investment funds and limited liability property partnerships.

(iv) It is impractical to determine the fair value of investment contracts with discretionary participation features due to the lack ofa reliable basis to measure such features.

(v) For financial liabilities designated as fair value through profit and loss there was no impact on profit from movements in creditrisk during 2007 (2006: £nil).

F-144

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Determination of fair value

The fair values of the financial assets and liabilities as shown on the table above have beendetermined on the following bases.

The fair values of the financial instruments for which fair valuation is required under IFRS and whichare in an active market are determined by the use of current market bid prices for quoted investments,or by using quotations from independent third parties, such as brokers and pricing services. If themarket for a financial investment of the Group is not active, the Group establishes fair value by usingvaluation techniques. The valuation techniques include the use of recent arm’s length transactions,reference to other instruments that are substantially the same, discounted cash flow analysis, optionadjusted spread models and if applicable enterprise valuation and may include a number of assumptionsrelating to variables such as credit risk and interest rates. Changes in assumptions relating to thesevariables could positively or negatively impact the reported fair value of these instruments.

The fair value estimates are made at a specific point in time, based upon available marketinformation and judgements about the financial instruments, including estimates of the timing andamount of expected future cash flows and the credit standing of counterparties. Such estimates do notreflect any premium or discount that could result from offering for sale at one time the Group’s entireholdings of a particular financial instrument, nor do they consider the tax impact of the realization ofunrealized gains or losses. In some cases the fair value estimates cannot be substantiated by comparisonto independent markets, nor can the disclosed value be realized in immediate settlement of the financialinstrument.

The loans and receivables have been shown net of provisions for impairment. The fair value of loanshas been estimated from discounted cash flows expected to be received. The rate of discount used wasthe market rate of interest.

The estimated fair value of derivative financial instruments reflects the estimated amount the Groupwould receive or pay in an arm’s length transaction. This amount is determined using quotations fromindependent third parties or valued internally using standard market practices. In accordance with theGroup’s risk management framework, all internally generated valuations are subject to independentassessment against external counterparties’ valuations.

The fair value of borrowings is based on quoted market prices, where available.

Refer to section A4 for the determination of fair value for investment contracts without fixed andguaranteed terms (notably UK unit-linked policies). For investment contracts in the US with fixed andguaranteed terms the fair value is determined based on the present value of future cash flowsdiscounted at current interest rates.

The fair value of other financial liabilities is determined using discounted cash flows of the amountsexpected to be paid.

F-145

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Use of valuation techniques

The carrying value of investments on the balance sheet of the Group which are not on activemarkets and therefore valued using valuation techniques as described above are as follows:

Shareholder-backed business

UKwith-profits

2007 fund UK (PRIL) US Total Total

£ million £ million £ million £ million £ million

Debt securities . . . . . . . . . . . . . . . . . . . . . . 3,002 509 2,863 3,372 6,374Equity securities . . . . . . . . . . . . . . . . . . . . . . 629 — — — 629Other investments . . . . . . . . . . . . . . . . . . . . 2,108 — 743 743 2,851

5,739 509 3,606 4,115 9,854

Shareholder-backed business

UKwith-profits

2006 fund UK (PRIL) US Total Total

£ million £ million £ million £ million £ million

Debt securities . . . . . . . . . . . . . . . . . . . . . . 2,945 396 2,859 3,255 6,200Equity securities . . . . . . . . . . . . . . . . . . . . . . 59 — — — 59Other investments . . . . . . . . . . . . . . . . . . . . 1,499 — 453 453 1,952

4,503 396 3,312 3,708 8,211

The majority of the financial investments valued using valuation techniques were debt securities. Ofthe debt securities valued using valuation techniques of £6,374 million (2006: £6,200 million) atDecember 31, 2007, debt securities with a fair value of £3,511 million (2006: £3,341 million) were heldby UK operations. £3,002 million (2006: £2,945 million) of this amount related to securities held bywith-profits operations and £509 million (2006: £396 million) related to securities held by theshareholder-backed UK annuity subsidiary Prudential Retirement Income Limited (PRIL). Debt securitiesvalued using valuation techniques held by the US operations were £2,863 million (2006: £2,859 million).

These debt securities include private debt securities such as private placements, project finance,asset securitizations and local authority securities. The securities are mainly long-dated and not regularlytraded and are valued internally using market standard practices. The majority of the debt securitiesabove are valued using matrix pricing, which is based on assessing credit quality of the underlyingborrower to derive a suitable discount rate relative to government securities. Under matrix pricing, thedebt securities are priced by taking the credit spreads on comparable quoted public debt securities andapplied to the equivalent debt instruments factoring a specified liquidity premium. The majority of theparameters used in this valuation technique are readily observable in the market and, therefore, are notsubject to interpretation.

For the UK operations, in accordance with the Group’s Risk Management Framework, all internallygenerated calculations are subject to independent assessment by the Group’s Fair Value Committeeswhich comprise members who are independent of the fund managers involved in the day-to-day tradingin these assets.

F-146

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

In addition to private debt securities, debt securities of US operations valued using valuationtechniques also included securities held by the Piedmont trust entity, an 80 per cent Jackson held statictrust formed as a result of a securitization of asset-backed securities in 2003 that are accounted for onan available-for-sale basis. As at December 31, 2007, the fair value of these Piedmont assets valuedusing valuation techniques was £316 million (2006: £405 million). Significant estimates and judgementsare also employed in valuing certain asset-backed and mortgage-backed securities held by the Piedmonttrust entity. These valuations may impact reported shareholder profit and loss amounts through thedetermination of impairment and recovery amounts.

Whilst management believes that the estimates and assumptions employed in developing the fairvalue estimates are reasonable and present management’s best estimate of such values, a reasonablerange of values exists with respect to most assumptions utilized in determining these values. As a resultof the potentially significant variability in the estimates of the assumptions used in these models, therange of reasonable estimates of the fair value of these securities is significant.

Management has obtained broker bids on these Piedmont trust assets that represent the value atwhich the Group could sell the investments, if forced. These bids are not based on full knowledge andhence analysis of the investments, but represent the best estimate of the worst case decline in marketvalue of these securities. The broker bids for these securities at December 31, 2007 totaled£260 million, a difference of £56 million (2006: £372 million, a difference of £33 million), from the fairvalue applied.

The equity securities and other investments which included property and other partnerships ininvestment pools, venture investments and derivative assets as shown on the table above are valuedusing valuation techniques which apply less readily observable market factors and more non-observablefactors than the matrix pricing technique as used for the majority of the debt securities. In addition tothe investments shown above, there are some minor amounts valued using valuation techniques in theGroup’s Asian operations.

The total amount of the change in fair value estimation using valuation techniques, includingvaluation techniques based on assumptions not wholly supported by observable market prices or rates,recognized in the income statement in 2007 was a gain of £101 million (2006: gain of £47 million; 2005:gain of £314 million) for the with-profits fund investments. Changes in values of assets of thewith-profits funds are reflected in policyholder liabilities and unallocated surplus. Due to the liabilityaccounting treatment of unallocated surplus, changes in values of securities held by with-profits fundshave no direct effect on the profit or loss attributable to shareholders or shareholders’ equity.

The total amount of the change in fair value estimation using valuation techniques, including thosebased on assumptions not wholly supported by observable market prices or rates, recognized in theincome statement in 2007 and which was attributable to shareholders, was a gain of £138 million (2006:gain of £68 million; 2005: £140 million) for the PRIL and US investments.

Interest income and expense

The interest income on financial assets not at fair value through profit and loss for the year endedDecember 31, 2007 from continuing operations was £2,016 million (2006: £2,006 million; 2005:£1,865 million).

F-147

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

The interest expense on financial liabilities not at fair value through profit and loss for the yearended December 31, 2007 from continuing operations was £699 million (2006: £624 million; 2005:£583 million).

G2: Market risk

Interest rate risk

The following table shows an analysis of the classes of financial assets and liabilities and their directexposure to interest rate risk. Each applicable class of the Group’s financial assets or liabilities isanalyzed between those exposed to fair value interest rate risk, cash flow interest rate risk and thosewith no direct interest rate risk exposure:

Not directlyFair value Cash flow exposed tointerest interest interest

2007 rate risk rate risk rate risk Total

£ million £ million £ million £ million

Financial assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . — — 4,951 4,951Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 678 7,211 — 7,889Debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,481 7,503 — 83,984Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,319 3,605 — 7,924Other investments (including derivatives) . . . . . . . . . . 664 285 3,447 4,396

82,142 18,604 8,398 109,144

Financial liabilitiesCore structural borrowings of shareholder-financed

operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,492 — — 2,492Operational borrowings attributable to shareholder-

financed operations . . . . . . . . . . . . . . . . . . . . . . 2,743 331 7 3,081Borrowings attributable to with-profits funds . . . . . . . 451 441 95 987Obligations under funding, securities lending and sale

and repurchase agreements . . . . . . . . . . . . . . . . . 594 3,487 — 4,081Investment contracts without discretionary participation

features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,922 — 12,110 14,032Other liabilities (including derivatives) . . . . . . . . . . . . 422 243 1,206 1,871

8,624 4,502 13,418 26,544

F-148

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Not directlyFair value Cash flow exposed to Total Discontinuedinterest interest interest continuing banking

2006 rate risk rate risk rate risk operations operations Total

£ million £ million £ million £ million £ million £ million

Financial assetsCash and cash equivalents . . . . — — 5,065 5,065 6 5,071Deposits . . . . . . . . . . . . . . . 4,872 2,887 — 7,759 — 7,759Debt securities . . . . . . . . . . . 53,938 25,805 — 79,743 1,976 81,719Loans . . . . . . . . . . . . . . . . . 4,521 2,137 — 6,658 7,096 13,754Other investments (including

derivatives) . . . . . . . . . . . . 292 342 2,508 3,142 78 3,220

Total for continuing operations . 63,623 31,171 7,573 102,367Discontinued banking

operations . . . . . . . . . . . . . 1,566 7,584 6 — 9,156 —

65,189 38,755 7,579 111,523

Financial liabilitiesBanking customer accounts . . . — — — — 5,554 5,554Core structural borrowings of

shareholder-financedoperations . . . . . . . . . . . . . 2,612 — — 2,612 451 3,063

Operational borrowingsattributable to shareholder-financed operations . . . . . . . 2,282 501 7 2,790 2,819 5,609

Borrowings attributable towith-profits funds . . . . . . . . 1,486 219 71 1,776 — 1,776

Obligations under funding,securities lending and saleand repurchase agreements . 851 3,381 — 4,232 — 4,232

Investment contracts withoutdiscretionary participationfeatures . . . . . . . . . . . . . . 1,562 — 11,480 13,042 — 13,042

Other liabilities (includingderivatives) . . . . . . . . . . . . 393 225 652 1,270 382 1,652

Total for continuing operations . 9,186 4,326 12,210 25,722Discontinued banking

operations . . . . . . . . . . . . . 451 8,527 228 — 9,206 —

9,637 12,853 12,438 34,928

F-149

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Liquidity analysis

After After After After1 year 5 years 10 years 15 years No Total

1 year to to to to Over stated carrying2007 or less 5 years 10 years 15 years 20 years 20 years maturity value

£ million £ million £ million £ million £ million £ million £ million £ million

Financial liabilitiesCore structural borrowings of

shareholder-financedoperations (note H13) . . . . . — 248 — 366 315 801 762 2,492

Operational borrowingsattributable to shareholder-financed operations(note H13) . . . . . . . . . . . . 2,618 51 355 — — 57 — 3,081

Borrowings attributable towith-profits funds(note H13) . . . . . . . . . . . . 103 232 265 — — 83 304 987

Obligations under funding,stocklending and sale andrepurchase agreements . . . . 4,081 — — — — — — 4,081

Other liabilities (includingderivatives) . . . . . . . . . . . . 1,314 181 12 33 6 173 152 1,871

8,116 712 632 399 321 1,114 1,218 12,512

F-150

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

After After After After1 year 5 years 10 years 15 years No Total

1 year to to to to Over stated carrying2006 or less 5 years 10 years 15 years 20 years 20 years maturity value

£ million £ million £ million £ million £ million £ million £ million £ million

Financial liabilitiesCore structural borrowings

of shareholder-financedoperations (note H13) . . . 150 248 — 335 313 803 763 2,612

Operational borrowingsattributable toshareholder-financedoperations (note H13) . . . 2,048 61 521 — — 160 — 2,790

Borrowings attributable towith-profits funds(note H13) . . . . . . . . . . 33 331 541 — 19 57 795 1,776

Obligations under funding,stocklending and sale andrepurchase agreements . . 4,232 — — — — — — 4,232

Other liabilities (includingderivatives) . . . . . . . . . . 749 203 19 39 7 125 128 1,270

Total for continuingoperations . . . . . . . . . . 7,212 843 1,081 374 339 1,145 1,686 12,680

Discontinued operations . . . 6,869 1,886 250 201 — — — 9,206

14,081 2,729 1,331 575 339 1,145 1,686 21,886

F-151

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

The table below shows the maturity profile for investment contracts on an undiscounted basis tothe nearest billion. This maturity profile has been based on the cash flow projections of expected benefitpayments as part of the determination of the value of in-force business when preparing EEV basisresults.

After After After After Total1 year 5 years 10 years 15 years undis-

1 year to to to to Over counted2007 or less 5 years 10 years 15 years 20 years 20 years value

£ billion £ billion £ billion £ billion £ billion £ billion £ billion

Life assurance investment contracts . . . . 3 12 16 16 15 25 87

After After After After Total1 year 5 years 10 years 15 years undis-

1 year to to to to Over counted2006 or less 5 years 10 years 15 years 20 years 20 years value

£ billion £ billion £ billion £ billion £ billion £ billion £ billion

Life assurance investment contracts . . . . 3 10 14 13 14 27 81

The maturity profile above excludes certain corporate unit-linked business with gross policyholderliabilities of £8 billion (2006: £8 billion) which has no stated maturity.

This table has been prepared on an undiscounted basis and accordingly the amounts shown for lifeassurance investment contracts differ from those disclosed on the balance sheet. Durations of long-termbusiness contracts, covering insurance and investment contracts, on a discounted basis are included insection D.

Credit risk

Of the total loans and receivables held £5 million (2006: £137 million) are past their due date buthave not been impaired, with £5 million (2006: £20 million) relating to continuing operations and £nil(2006: £117 million) to discontinued banking operations. Of the total past due but not impaired,£5 million (2006: £122 million) are less than one year past their due date and £nil (2006: £15 million)between two years and three years past their due date. The Group expects full recovery of these loansand receivables. Financial assets that would have been past due or impaired had the terms not beenrenegotiated amounted to £nil (2006: £19 million).

The fair value of collateral held against loans that are past due and impaired at December 31, 2007was £nil (2006: £1 million). The fair value of collateral held against loans that are past due but notimpaired at December 31, 2007 was £nil (2006: £3 million). Collateral would predominately consist ofpolicy loans that are secured by the cash values of the underlying policy.

Details with regards to loans and advances to customers by discontinued banking operations areprovided in note J5.

In addition, during the year the Group took possession of £7 million (2006: £7 million) of othercollateral held as security, which mainly consists of assets that could be readily convertible into cash.

F-152

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Group exposure to holdings in sub-prime and Alt-A assets, monoline insurers and CDO funds

Included in the total of debt securities of £83,984 million at December 31, 2007 are the followingholdings:

(i) Sub-prime and Alt-A securities

Shareholder-backed business

2007

£ million

US insurance operations—Sub-prime (AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237—Alt-A (77% AAA, 17% AA) . . . . . . . . . . . . . . . . . . . . . . . . . . . 660

Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

912

With-profits operations

2007

£ million

UK insurance operations—Sub-prime (AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129—Alt-A (96% AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

236

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,148

Further details on Jackson’s sub-prime and Alt-A securities are given in section D3(b)

(ii) Direct holdings in monoline insurers

2007

£ million

Shareholder-backed operations:US insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

27

With-profits operations:Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

F-153

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

(iii) Holdings in debt securities with a wrap guarantee from a monoline insurer

2007

£ million

Shareholder-backed operations:US insurance operations

Residential mortgage-backed securities:Sub-prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Alt-A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79Private corporate issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

155UK insurance operations (98% held by PRIL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 422

577

With-profits operations:Asian insurance operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9UK insurance operations (73% held by PAL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,168

1,177

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,754

The holdings of UK insurance operations are primarily in PFI and utility stocks.

(iv) CDO funds (all without sub-prime exposure)

2007

£ million

Shareholder-backed business:US insurance operations (65% AAA, 8% AA)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260Asian insurance operations (72% AAA, 28% AA-) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62UK insurance operations—PRIL (AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36Other operations (AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

377

With-profits operations:UK insurance operations (79% AAA, 8% AA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Asian operations (AAA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240UK insurance operations (98% held by PRIL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

299

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 676

* Including the Group’s economic interest in Piedmont (as described in section G1) and other consolidated CDO funds.

F-154

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Currency risk

As at December 31, 2007, the Group held 19 per cent (2006: 16 per cent) and 13 per cent (2006:15 per cent) of its financial assets and financial liabilities respectively, in currencies, mainly US dollar andEuro, other than the functional currency of the relevant business unit.

The financial assets, of which 86 per cent (2006: 90 per cent) are held by the PAC with-profitsfund, allow the PAC with-profits fund to obtain exposure to foreign equity markets.

The financial liabilities, of which 19 per cent (2006: 14 per cent) are held by the PAC with-profitsfund, mainly relate to foreign currency borrowings.

The exchange risks inherent in these exposures are mitigated through the use of derivatives, mainlyforward currency contracts (note G3 below).

The amount of exchange gains recognized in the income statement in 2007, except for those arisingon financial instruments measured at fair value through profit and loss, is £102 million (2006:£73 million). This constitutes £109 million (2006: £107 million) gains on Medium Term Notes (MTN)liabilities and £7 million of net losses (2006: £34 million net losses), mainly arising on investments of thePAC with-profits fund. The gains on MTN liabilities are fully offset by value movements on cross-currency swaps, which are measured at fair value through profit and loss.

See also note J3 for details of the market risks faced by the discontinued banking operations.

G3: Derivatives and hedging

Derivatives

The Group enters into a variety of exchange traded and over-the-counter derivative financialinstruments, including futures, options, forward currency contracts and swaps such as interest rateswaps, cross-currency swaps, swaptions and credit default swaps.

All over-the-counter derivative transactions are conducted under standardized ISDA (InternationalSwaps and Derivatives Association Inc) master agreements and the Group has collateral agreementsbetween the individual Group entities and relevant counterparties in place under each of these marketmaster agreements.

The total fair value balances of derivative assets and liabilities as at December 31, 2007 were asfollows:

UK Other Totalinsurance US continuing continuing

2007 operations operations operations operations

£ million £ million £ million £ million

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . 571 390 136 1,097Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . (689) (158) (233) (1,080)

(118) 232 (97) 17

F-155

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

UK Other Total Discontinuedinsurance US continuing continuing banking

2006 operations operations operations operations operations Total

£ million £ million £ million £ million £ million £ million

Derivative assets . . . . . . . . . . 476 254 90 820 78 898Derivative liabilities . . . . . . . . (268) (92) (149) (509) (154) (663)

208 162 (59) 311 (76) 235

The above derivative assets and derivative liabilities are included in ‘other investments’ and ‘otherliabilities’ in the primary statements.

The notional amount of the derivatives, distinguishing between UK insurance, US, discontinuedbanking and other operations was as follows:

UK insuranceoperations US

Notional amount on Notional amount onwhich future which future

payments are based payments are based

2007 Asset Liability Asset Liability

£ million £ million £ million £ million

As at December 31, 2007Cross-currency swaps* . . . . . . . . . . . . . . . . . . . . . . . . . . 658 648 602 —Equity index call options . . . . . . . . . . . . . . . . . . . . . . . . — 23 — —Swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,125 — 25,620 1,005Futures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,905 2,176 — 371Forwards* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,243 17,635 — —Inflation swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,758 1,319 — —Credit default swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,181 59 — —Single stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —Credit derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 3 20Put options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 3,642 —Equity options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 5,545 11FTSE swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — —Total return swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 956 955 226 —Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,335 4,663 1,708 3,587

F-156

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

UK insurance Discontinued bankingoperations US operations

Notional amount on Notional amount on Notional amount onwhich future which future which future

payments are based payments are based payments are based

2006 Asset Liability Asset Liability Asset Liability

£ million £ million £ million £ million £ million £ million

As at December 31, 2006Cross-currency swaps* . . . . . . . . . 579 499 537 26 348 360Equity index call options . . . . . . . . — — 583 12 — —Swaptions . . . . . . . . . . . . . . . . . . 1,125 — 13,540 11,751 — —Futures . . . . . . . . . . . . . . . . . . . . 2,306 2,463 — 274 — —Forwards* . . . . . . . . . . . . . . . . . . 12,614 12,465 — — 383 376Inflation swaps . . . . . . . . . . . . . . . 1,109 1,109 — — — —Credit default swaps . . . . . . . . . . . — — — — 1,787 —Single stock options . . . . . . . . . . . — 6 — — — —Credit derivatives . . . . . . . . . . . . . — — — 18 — —Put options . . . . . . . . . . . . . . . . . — — 2,708 — — —FTSE swap . . . . . . . . . . . . . . . . . — — — — 49 49Total return swaps . . . . . . . . . . . . 895 833 230 65 — —Interest rate swaps . . . . . . . . . . . . 2,976 3,388 2,407 1,988 3,117 3,117

* In addition, the other operations, including the Group Treasury function and the Asian operations, have cross-currency swapassets and liabilities with notional amounts of £730 million (2006: £754 million) and £1,401 million (2006: £1,743 million)respectively, forward currency contracts assets and liabilities with notional amounts of £983 million (2006: £443 million) and£773 million (2006: £63 million) respectively, interest rate swaps of £2,799 million (2006: £1,856 million) and inflation swapliabilities with notional amounts of £150 million (2006: £150 million).

These derivatives are used for efficient portfolio management to obtain cost effective and efficientexposure to various markets in accordance with the Group’s investment strategies and to manageexposure to interest rate, currency, credit and other business risks. See also note D3 for use ofderivatives by the Group’s US operations.

The Group uses various interest rate derivative instruments such as interest rate swaps to reduceexposure to interest rate volatility.

The UK insurance operations use various currency derivatives in order to limit volatility due toforeign currency exchange rate fluctuations arising on securities denominated in currencies other thansterling. See also note G2 above. In addition, total return swaps and interest rate swaps are held forefficient portfolio management.

As part of the efficient portfolio management of the PAC with-profits fund, the fund may, from timeto time, invest in cash-settled forward contracts over Prudential plc shares, which are accounted forconsistently with other derivatives. This is in order to avoid a mismatch of the with-profits investmentportfolio with the investment benchmarks set for its equity-based investment funds. The contracts willform part of the long-term investments of the with-profits fund. These contracts are subject to a numberof limitations for legal and regulatory reasons.

F-157

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

Some of the Group’s products, especially those sold in the US, have certain guarantee featureslinked to equity indexes. A mismatch between product liabilities and the performance of the underlyingassets backing them, exposes the Group to equity index risk. In order to mitigate this risk, the relevantbusiness units purchase swaptions, equity options and futures to match asset performance with liabilitiesunder equity-indexed products.

The US operations and some of the UK operations hold large amounts of interest-rate sensitiveinvestments that contain credit risks on which a certain level of defaults is expected. These entities havepurchased some swaptions in order to manage the default risk on certain underlying assets and hencereduce the amount of regulatory capital held to support the assets.

During the period of ownership in 2007, 2006 and in 2005, Egg used derivative instruments for thepurpose of supporting the strategic and operational business activities and reducing and eliminating therisk of loss arising from changes in interest rates and foreign exchange rates. Derivatives were usedsolely to hedge risk exposures and Egg did not take any trading position in derivatives.

For the purpose of reducing interest rate risk, Egg used a number of derivative instruments,including interest rate swaps and forward agreements. Additionally, swaps were used to provide caps tothe funding cost of the credit card product.

Egg also made general use of credit default swaps to manage credit risk without changing theunderlying product or investment portfolios.

For the purpose of reducing currency risk, Egg used forward exchange contracts and currencyswaps.

Hedging

The Group has formally assessed and documented the effectiveness of the following hedges underIAS 39:

Fair value hedges

The Group uses interest rate derivatives to hedge the interest exposures on its US$1 billion, 6.5 percent perpetual subordinated capital securities and US$300 million, 6.5 per cent perpetual subordinatedcapital securities. Where the hedge relationship is de-designated and re-designated, the fair valueadjustment to the hedged item up to the point of de-designation continues to be reported as part of thebasis of the hedged item and is amortized to the income statement based on a recalculated effectiveinterest rate over the residual period to the first break clause date of the perpetual subordinated capitalsecurities.

In addition, Jackson has had a collar fair value hedge in place since March 1, 2005. This commonstock equity collar transaction was entered into to protect Jackson’s unrealized gain of US$5.9 million onan equity investment. The hedge expires in March 2008.

The fair value of the derivatives designated as fair value hedges above at December 31, 2007, werean asset of £5 million and liabilities of £25 million (2006: asset of £5 million and liabilities of£29 million). Movements in the fair value of the hedging instruments of a net gain of £6 million

F-158

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

(2006: net gain of £4 million; 2005: net loss of £14 million) and the hedged items of a net loss of£4 million (2006: net loss of £4 million; 2005: net gain of £14 million) are recorded in the incomestatement in respect of the fair value hedges above.

Cash flow hedges

Following the sale of Egg in 2007, the Group has no cash flow hedges in place. In 2006 Egg hadcash flow hedged certain balance sheet items which were subject to interest rate risk using interest rateand cross currency interest rate swaps, with the effective part of any gain or loss on the swapsrecognized directly in equity. As at December 31, 2006, the notional amount of the cash flow hedgewas £1,711 million and the fair value was an asset of £9 million. The cash flows were periodicallyupdated based on the underlying banking portfolios. There was no ineffective portion of the cash flowhedge recognized in the income statement in 2006. The net movement on the ineffective portion of thecash flow hedge recognized in the income statement in 2005 was a loss of £0.2 million.

Net investment hedges

The Group has entered into a series of three-month period forward currency transactions whichtogether form a US$2 billion net investment hedge of the currency exposure of the net investments inthe US operations. The forward currency contracts were renewed throughout 2007 and 2006. Theforward currency contracts in place at December 31, 2007 expire in March 2008. The fair value of theforward currency contracts at December 31, 2007 was a liability of £44 million (2006: a liability of£4 million).

In addition, the Group has designated perpetual subordinated capital securities totallingUS$1.55 billion as a net investment hedge to hedge the currency risks related to the net investment inJackson. The carrying value of the subordinated capital securities was £763 million (2006: £763 million)as at December 31, 2007. The foreign exchange gain of £13 million (2006: gain of £110 million; 2005:loss of £78 million) on translation of the borrowings to pounds sterling at the balance sheet date isrecognized in the translation reserve in shareholders’ equity.

The net investment hedges were 100 per cent effective.

G4: Derecognition, securitization and collateral

Securities lending and reverse repurchase agreements

The Group has entered into securities lending (including repurchase agreements) whereby blocks ofsecurities are loaned to third parties, primarily major brokerage firms. The amounts above the fair valueof the loaned securities required to be held as collateral by the agreements depend on the quality of thecollateral, calculated on a daily basis. The loaned securities are not removed from the Group’sconsolidated balance sheet, rather they are retained within the appropriate investment classification.Collateral typically consists of cash, debt securities, equity securities and letters of credit. AtDecember 31, 2007, the Group had lent £17,172 million (2006: £11,418 million) (of which£11,461 million (2006: £7,592 million) was lent by the PAC with-profits fund) of securities and heldcollateral under such agreements of £18,125 million (2006: £11,814 million) (of which £12,105 million(2006: £7,934 million) was held by the PAC with-profits fund).

F-159

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

At December 31, 2007, the Group had entered into reverse repurchase transactions under which itpurchased securities and had taken on the obligation to resell the securities for the purchase price of£1,361 million (2006: £1,435 million), together with accrued interest.

Collateral and pledges under derivative transactions

At December 31, 2007, the Group had pledged £260 million (2006: £263 million) for liabilities andheld collateral of £292 million (2006: £212 million) in respect of over-the-counter derivative transactions.

Securitization

At December 31, 2006 Egg had an outstanding balance of UK credit card receivables in its trustvehicle, Arch (Term) Limited, created in 2002 for the purpose of asset-backed securitization, of£2.8 billion. The note holders in securitizations from this vehicle had a proportional interest in eachaccount balance in the trust. As at December 31, 2006, the value of this interest was £2.3billion. Thissecuritization did not qualify for derecognition under IAS 39 and the total portfolio was, therefore,included in loans and receivables. The funding giving rise to the note-holders’ interest was includedwithin operational borrowings attributable to shareholder-financed operations. Following the disposal ofEgg the Group no longer holds these balances.

G5: Impairment of financial assets

In accordance with the Group’s accounting policy set out in note A4, impairment reviews wereperformed for available-for-sale securities and loans and receivables. In addition, impairment reviewswere undertaken for the reinsurers’ share of policyholder liability provisions.

During the year ended December 31, 2007, impairment losses of £184 million (2006: £416 million;2005: £278 million) were recognized. These were £149 million (2006: £384 million; 2005: £242 million)for loans and advances to customers in discontinued banking operations and £35 million (2006:£32 million; 2005: £36 million) for continuing operations, mainly being in respect of available-for-salesecurities held by Jackson.

Impairment losses recognized on available-for-sale securities amounted to £30 million (2006:£24 million; 2005: £24 million). Of this amount, 14 per cent (2006: 76 per cent; 2005: 28 per cent) hasbeen recorded on structured asset-backed securities, primarily due to reduced cash flow expectations onsuch securities that are collateralized by diversified pools of primarily below investment grade securities.57 per cent (2006: 24 per cent; 2005: 53 per cent) of the losses related to the impairment of fixedmaturity securities of the top five individual corporate issuers, reflecting a deteriorating business outlookof the companies concerned.

The impairment losses have been recorded in ‘acquisition costs and other operating expenditure’ inthe income statement.

F-160

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

G: Financial assets and liabilities (Continued)

In 2007, the Group realized gross losses on sales of available-for-sale securities of £86 million(2006: £58 million; 2005: £29 million). 46 per cent (2006: 30 per cent; 2005: 42 per cent) of theselosses related to the disposal of fixed maturity securities of six (2006: six; 2005: six) individual issuers,which were disposed of to rebalance the portfolio in the US operations in response to the unstablemortgage lending market in the US.

The effect of those reasonably likely changes in the key assumptions underlying the estimates thatunderpin the assessment of whether impairment has taken place depends on the factors described innote A3. A key indicator of whether such impairment may arise in future, and the potential amounts atrisk, is the profile of gross unrealized losses for fixed maturity and equity securities accounted for on anavailable-for-sale basis by reference to the time periods by which the securities have been heldcontinuously in an unrealized loss position and by reference to the maturity date of the securitiesconcerned.

For 2007, the difference between the carrying value and book cost of equity securities in grossunrealized loss position was £nil (2006: £(1) million; 2005: £(1) million). For 2007 the amounts of grossunrealized losses for fixed maturity securities classified as available-for-sale under IFRS in an unrealizedloss position was £439 million (2006: £256 million; 2005: £263 million) (see note D3 for further details).

H: Other information on balance sheet items

H1: Intangible assets attributable to shareholders

(a) Goodwill

2007 2006

£ million £ million

CostAt January 1 and December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,461 1,461Aggregate impairmentAt January 1 and December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (120) (120)

Net book amount at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,341 1,341

Impairment testing

Goodwill does not generate cash flows independently of other groups of assets and thus is assignedto cash generating units (CGUs) for the purposes of impairment testing. These CGUs are based uponhow management monitors the business and represent the lowest level to which goodwill can beallocated on a reasonable basis. An allocation to CGUs of the Group’s goodwill attributable toshareholders is shown below:

2007 2006

£ million £ million

M&G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,153 1,153Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188 188

1,341 1,341

F-161

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

‘Other’ represents goodwill amounts allocated across CGUs in Asia and US operations. Thesegoodwill amounts are not individually material.

Assessment of whether goodwill may be impaired

With the exception of M&G, the goodwill attributable to shareholders in the balance sheet relatesto acquired life businesses. The Company routinely compares the aggregate of net asset value andacquired goodwill on an IFRS basis of acquired life business with the value of the business asdetermined using the EEV methodology, as described in note D1. Any excess of IFRS over EEV carryingvalue is then compared with EEV basis value of current and projected future new business to determinewhether there is any indication that the goodwill in the IFRS balance sheet may be impaired.

Goodwill is tested for impairment by comparing the CGUs carrying amount, excluding any goodwill,with its recoverable amount.

M&G

The recoverable amount for the M&G CGU has been determined by calculating its value in use. Thishas been calculated by aggregating the present value of future cash flows expected to be derived fromthe component businesses of M&G (based upon management projections) and its current surplus capital.

The discounted cash flow valuation has been based on a three-year plan prepared by M&G, andapproved by the directors of Prudential plc, and cash flow projections for later years.

The value in use is particularly sensitive to a number of key assumptions as follows:

(i) The assumed growth rate on forecast cash flows beyond the terminal year of the budget. Agrowth rate of 2.5 per cent has been used to extrapolate beyond the plan period.

(ii) The risk discount rate. Differing discount rates have been applied in accordance with thenature of the individual component businesses. For retail and institutional business a riskdiscount rate of 12 per cent has been applied. This represents an average implied discount ratefor comparable UK listed asset managers calculated by reference to risk-free rates, equity riskpremiums of five per cent and an average ‘beta’ factor for relative market risk of comparableUK listed asset managers. A similar approach has been applied for the other componentbusinesses of M&G.

(iiii) That asset management contracts continue on similar terms.

Management believes that any reasonable change in the key assumptions would not cause thecarrying amount of M&G to exceed its recoverable amount.

Japanese life company

The aggregate goodwill impairment of £120 million at December 31, 2007 and 2006 relates to thegoodwill held in relation to the Japanese life operation which was impaired in 2005.

F-162

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

(b) Deferred acquisition costs and acquired in-force value of long-term business contractsattributable to shareholders

Other intangible assets in the Group consolidated balance sheet attributable to shareholders consistof:

2007 2006

£ million £ million

Deferred acquisition costs (DAC) related to insurance contracts as classified underIFRS 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,644 2,315

Deferred acquisition costs related to investment management contracts, includinglife assurance contracts classified as financial instruments and investmentmanagement contracts under IFRS 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 110

2,757 2,425

Present value of acquired in-force policies for insurance contracts as classifiedunder IFRS 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 66

Present value of future profits of acquired investment management contracts,including life assurance contracts classified as financial instruments andinvestment management contracts under IFRS 4 . . . . . . . . . . . . . . . . . . . . . . 4 6

Distribution rights* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 —

79 72

Total of deferred acquisition costs and acquired in-force value of long-term businesscontracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,836 2,497

* Distribution rights relate to facilitation fees paid in 2007 of £16 million which are amortized over 8 years. The amortizationcharge for the year to December 31, 2007 was £0.3 million.

Deferred acquisition costs related to insurance contracts attributable to shareholders

The movement in deferred acquisition costs relating to insurance contracts attributable toshareholders is as follows:

2007 2006

£ million £ million

Deferred acquisition costs at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,315 2,200Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 694 623Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (410) (299)Exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (290)Change in shadow DAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 81

Deferred acquisition costs at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,644 2,315

F-163

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Deferred acquisition costs related to investment management contracts attributable to shareholders

Incremental costs associated with the origination of investment management contracts written bythe Group’s insurance and asset management businesses are capitalized and amortized as the relatedrevenue is recognized. Deferred acquisition costs related to investment management contracts are allinternally generated.

Amortization of this intangible asset is included in the ‘acquisition costs and other operatingexpenditure’ line in the income statement.

2007 2006

£ million £ million

At January 1Gross amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 118Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) (14)

Net book amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 104

Additions (through internal development) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 36Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (6)Other charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (24)

At December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 110

Comprising:Gross amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 130Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) (20)

Net book amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 110

Present value of acquired in-force business of long-term business contracts attributable toshareholders

Prior to the adoption of IFRS 4, the present value of acquired in-force business (PVAIF) wasaccounted for under UK GAAP. On January 1, 2005, following the adoption of IFRS 4, PVAIF relating toinvestment contracts without discretionary participation features, which was previously included withinlong-term business, is removed and replaced by an asset representing the present value of the futureprofits of the asset management component of these contracts, where applicable. These contracts areaccounted for under the provisions of IAS 18. The remainder of the PVAIF balance relates to insurancecontracts and is accounted for under UK GAAP as permitted by IFRS 4.

The present value of future profits of acquired asset management contracts relates to unit-linkedcontracts acquired as part of the M&G acquisition in 1999.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Amortization is charged to the ‘acquisition costs and other operating expenditure’ line in the incomestatement over the period of provision of asset management services as those profits emerge.

2007 2006

Insurance Investment Insurance Investmentcontracts management contracts management

£ million £ million £ million £ million

At January 1Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 12 233 12Accumulated amortization . . . . . . . . . . . . . . . . . . . (154) (6) (141) (3)

Net book amount . . . . . . . . . . . . . . . . . . . . . . . 66 6 92 9

Exchange differences . . . . . . . . . . . . . . . . . . . . . . 2 — (4) —Amortization charge . . . . . . . . . . . . . . . . . . . . . . . (9) (2) (22) (3)

At December 31 . . . . . . . . . . . . . . . . . . . . . . . . 59 4 66 6

ComprisingCost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 12 220 12Accumulated amortization . . . . . . . . . . . . . . . . . . . (102) (8) (154) (6)

Net book amount . . . . . . . . . . . . . . . . . . . . . . . 59 4 66 6

H2: Intangible assets attributable to the PAC with-profits fund

(a) Goodwill and other acquired intangible assets in respect of acquired investmentsubsidiaries

Other acquired2007 Goodwill intangible assets Total

£ million £ million £ million

Carrying value at January 1, 2007 . . . . . . . . . . . . . . . . . . . 587 243 830Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313 — 313Amortization charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (35) (35)Deconsolidated venture fund investments . . . . . . . . . . . . . . . . (708) (208) (916)

At December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 — 192

All goodwill figures shown above reflect the cost. These have no impairment losses or otherwrite-offs.

All goodwill additions relate to the UK and the long-term business segments. Following the sale bythe Group of PPM Capital in November 2007, the Group no longer controls venture fund investmentsand consequently has ceased to consolidate these operations, with these carried as investments oflong-term business at fair value through profit and loss going forwards. Additional details on the changesin consolidated entities are provided in note I6.

F-165

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

The recoverable amount for the venture fund investments previously controlled by the Groupthrough PPM Capital was determined on a portfolio CGU basis by aggregating fair values calculated foreach entity less costs to sell these entities.

The fair value of each entity prior to deconsolidation following the disposal of PPM Capital wascalculated in accordance with the International Private Equity and Venture Capital Valuation Guidelineswhich set out industry best practice for determining the fair value of private equity investments. Theguidelines require that an enterprise value is calculated for each investment, typically using anappropriate multiple applied to the company’s maintainable earnings. All amounts relating to financialinstruments ranking higher in a liquidation than those controlled by the Group prior to the disposal ofPPM Capital were then deducted from the enterprise value and a marketability discount applied to theresult to give a fair value attributable to the instruments previously controlled by the Group. Themarketability discount ranged from 10 per cent to 30 per cent, depending on the Group’s level ofcontrol over a realization process.

Management believes that any reasonable change in the key assumptions would not have given riseto an impairment charge.

(b) Deferred acquisition costs

2007 2006

£ million £ million

At January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 35Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) (6)

At December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 31

The above costs relate to non-participating business written by the PAC with-profits sub-fund.

No deferred acquisition costs are established for the participating business.

H3: Reinsurers’ share of insurance contract liabilities

2007 2006

£ million £ million

Insurance contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724 878Claims outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 67

783 945

F-166

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

The movement on reinsurers’ share of insurance contract liabilities is as follows:

2007 2006

£ million £ million

At January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 878 1,203Movement in the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (147) (265)Foreign exchange translation differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (60)

At December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 724 878

H4: Tax assets and liabilities

Assets

Of the £285 million (2006: £404 million) current tax recoverable, the majority is expected to berecovered in one year or less.

Deferred tax asset

2007 2006

£ million £ million

Unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129 83Balances relating to investment and insurance contracts . . . . . . . . . . . . . . . . . . . 2 439Short-term timing differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744 446Capital allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 12Unused deferred tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 —

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925 980Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 32

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 925 1,012

Deferred tax assets are recognized to the extent that they are regarded as recoverable, that is tothe extent that, on the basis of all available evidence, it can be regarded as more likely than not thatthere will be suitable taxable profits from which the future reversal of the underlying temporarydifferences can be deducted. The UK taxation regime applies separate rules to trading and capital profitsand losses. The distinction between temporary differences that arise from items of either a trading orcapital nature may affect the recognition of deferred tax assets. Accordingly, for the 2007 results andbalance sheet position at December 31, 2007, the possible tax benefit of approximately £280 million(2006: £333 million), which may arise from capital losses valued at approximately £1.4 billion (2006:£1.7 billion), is sufficiently uncertain that it has not been recognized. In addition, a potential deferredtax asset of £112 million (2006: £71 million), which may arise from trading losses of approximately£350 million (2006: £245 million), is sufficiently uncertain that it has not been recognized.

F-167

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Liabilities

Of the £1,237 million (2006: £1,303 million) current tax liability, it is not practicable to estimatehow much is expected to be settled in one year or less due to the uncertainty over when outstandingissues will be agreed with HM Revenue & Customs.

Deferred tax liability

2007 2006

£ million £ million

Unrealized gains on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,098 2,346Balances relating to investment and insurance contracts . . . . . . . . . . . . . . . . . . . 599 613Short-term timing differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 766 916Capital allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 7

3,475 3,882

Unprovided deferred income tax liabilities on temporary differences associated with investments insubsidiaries, associates and interests in joint ventures are considered to be insignificant due to theavailability of various UK tax exemptions and reliefs.

Discounting

Deferred tax asset and liability balances have not been discounted.

F-168

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H5: Accrued investment income and other debtors

2007 2006

£ million £ million

Accrued investment incomeInterest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,434 1,331Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 563

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,023 1,894Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 6

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,023 1,900

Other debtorsSurplus in respect of PSPS defined benefit pension schemes:(note I1)*

Surplus, gross of deferred tax, based on scheme assets held, includinginvestments in Prudential insurance policies:Attributable to PAC with-profits fund (i.e. absorbed by the liability for

unallocated surplus) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 —Attributable to shareholder-financed operations (i.e. to shareholders’ equity) . . 163 —

528 —Less investments in Prudential insurance policies . . . . . . . . . . . . . . . . . . . . . . (140) —

Net surplus after elimination of investments in Prudential insurance policies andmatching policyholder liability from Group balance sheet . . . . . . . . . . . . . . . . . 388 —

Premiums receivable:From policyholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 200From intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12From reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 22Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638 619

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,297 853Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 199

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,297 1,052

Total accrued investment income and other debtors . . . . . . . . . . . . . . . . . . 3,320 2,952

* The 2007 pension surplus amounts relate to the PSPS defined benefit scheme. The 2006 amounts are included in H14Provisions note.

Of the £3,320 million (2006: £2,952 million) of accrued investment income and other debtors,£452 million (2006: £800 million) is expected to be settled after one year or more.

F-169

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H6: Property, plant and equipment

Property, plant and equipment comprise Group occupied properties, development property andtangible assets. A reconciliation of the carrying amount of these items from the beginning of the year tothe end of the year is as follows:

Groupoccupied Development Tangible Continuing Discontinuedproperty property assets operations operations Total

£ million £ million £ million £ million £ million £ million

At January 1, 2006Cost . . . . . . . . . . . . . . . . . . . . . . . . 262 175 853 1,290 246 1,536Accumulated depreciation . . . . . . . . . . . (36) — (433) (469) (157) (626)

Net book amount . . . . . . . . . . . . . . . 226 175 420 821 89 910

Year ended December 31, 2006Opening net book amount . . . . . . . . . . . 226 175 420 821 89 910Exchange differences . . . . . . . . . . . . . . (8) — (8) (16) — (16)Depreciation charge . . . . . . . . . . . . . . (6) — (96) (102) (43) (145)Additions . . . . . . . . . . . . . . . . . . . . . 4 36 123 163 11 174Arising on acquisition of subsidiaries . . . . — — 40 40 — 40Disposals . . . . . . . . . . . . . . . . . . . . . (24) — (80) (104) 6 (98)Reclassification from held for investment . . — 268 — 268 — 268

Closing net book amount . . . . . . . . . . 192 479 399 1,070 63 1,133

At January 1, 2007Cost . . . . . . . . . . . . . . . . . . . . . . . . 225 479 917 1,621 226 1,847Accumulated depreciation . . . . . . . . . . . (33) — (518) (551) (163) (714)

Net book amount . . . . . . . . . . . . . . . . 192 479 399 1,070 63 1,133

Year ended December 31, 2007Opening net book amount . . . . . . . . . . . 192 479 399 1,070 63 1,133Exchange differences . . . . . . . . . . . . . . 2 — 1 3 — 3Depreciation charge . . . . . . . . . . . . . . (48) — (50) (98) (9) (107)Additions . . . . . . . . . . . . . . . . . . . . . 71 48 109 228 3 231Arising on acquisition of subsidiaries . . . . 5 — 33 38 — 38Disposal of subsidiaries . . . . . . . . . . . . — — — — (57) (57)Deconsolidated venture fund investmentsI6 . (69) — (261) (330) — (330)Disposals . . . . . . . . . . . . . . . . . . . . . (2) — (25) (27) — (27)Reclassification from held for investment . . — 120 — 120 — 120Reclassification from held for sale . . . . . . — 8 — 8 — 8

Closing net book amount . . . . . . . . . . 151 655 206 1,012 — 1,012

At December 31, 2007Cost . . . . . . . . . . . . . . . . . . . . . . . . 172 655 612 1,439 — 1,439Accumulated depreciation . . . . . . . . . . . (21) — (406) (427) — (427)

Net book amount . . . . . . . . . . . . . . . 151 655 206 1,012 — 1,012

F-170

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Of the above net book amounts, £nil (2006: £102 million) of Group occupied property and £nil(2006: £261 million) of tangible assets are attributable to consolidated venture investment subsidiaries ofthe PAC with-profits fund at December 31, 2007. All additions arising on acquisition of subsidiariesrelate to acquisitions of venture investment subsidiaries of the PAC with-profits fund.

Capital expenditure: property, plant and equipment by primary segment

2007 2006

£ million £ million

Long-term business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 153Asset management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 6Unallocated corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 162Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 12

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 174

Capital expenditure: property, plant and equipment by secondary segment

2007 2006

£ million £ million

UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145 122US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 15Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 25

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228 162Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 12

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231 174

F-171

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H7: Investment properties

Investment properties principally relate to the PAC with-profits fund and are carried at fair value. Areconciliation of the carrying amount of investment properties at the beginning and end of the year isset out below:

2007 2006

£ million £ million

At January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,491 13,180Additions:

Resulting from acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,707 1,185Resulting from expenditure capitalised . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 51Resulting from acquisitions through business combinations . . . . . . . . . . . . . . . — 2

Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,378) (398)Net (loss) gains from fair value adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,128) 813Net foreign exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 (42)Transfers to held for sale assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) (32)Transfers to development properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (121) (268)

At December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,688 14,491

The income statement includes the following items in respect of investment properties:

2007 2006 2005

£ million £ million £ million

Rental income from investment properties . . . . . . . . . . . . . . . . . . . . . 670 744 765Direct operating expenses (including repairs and maintenance expenses)

arising from investment properties:That generated rental income during the year . . . . . . . . . . . . . . . . . 117 118 133That did not generate rental income during the year . . . . . . . . . . . . — 8 7

Total direct operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 126 140

F-172

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Investment properties of £3,665 million (2006: £4,990 million) are held under finance leases. Areconciliation between the total of future minimum lease payments at the balance sheet date, and theirpresent value is shown below:

2007 2006

£ million £ million

Future minimum lease payments at December 31 . . . . . . . . . . . . . . . . . . . . . . . 979 400Future finance charges on finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (877) (325)

Present value of minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 75

Future minimum lease payments are due as follows:Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 41 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 15Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 952 381

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 979 400

The present values of these minimum lease payments are:Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 31 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 15Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 57

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 75

Contingent rent is that portion of the lease payments that is not fixed in amount but is based onthe future value of a factor that changes other than with the passage of time. Contingent rentrecognized as an expense in 2007 amounted to £14 million (2006: £11 million; 2005: £21 million).Contingent rents recognized as income in the year amounted to £26 million (2006: £33 million; 2005:£46 million).

The Group’s policy is to rent investment properties to tenants through operating leases. Minimumfuture rentals to be received on non-cancellable operating leases are receivable in the following periods:

2007 2006

£ million £ million

Less than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 679 6581 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,464 2,382Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,266 6,135

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,409 9,175

The total minimum future rentals to be received on non-cancellable sub-leases for land andbuildings for the year ended December 31 2007 are £2,746 million (2006: £2,651 million).

F-173

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H8: Investments in associates and joint ventures

Investments in associates

The Group had four associates at December 31, 2007 (2006: three; 2005: one) that are accountedfor using the equity method. The Group acquired one new associate in 2007, a 30 per cent interest inThe Nam Khang, a Vietnamese property developer. The Group’s other associates, a 30 per cent interestin Apollo Education and Training Organization Vietnam, a 25 per cent interest in OYO DevelopmentsLimited, and a 38.6 per cent interest in IFonline Group Limited (IFonline), were held by the Group inboth 2007, 2006 and 2005.

The Group also has investments in associates which meet the IAS 28 criteria for measurement atfair value through profit and loss in accordance with IAS 39.

Associates accounted for using the equity method

Equity accounting is applied to IFonline based on its reporting period of the year to November 30and is adjusted for material changes up to December 31. Accordingly, the information is deemed tocover the same period as that of the Group.

A summary of the movements in investments in associates accounted for using the equity methodin 2007, 2006 and 2005 is set out below:

TotalShare of Share of Share of carryingcapital reserves net assets Goodwill value

£m £m £m £m £m

Balance at January 1, 2005 . . . . . . . . . . . . . . 4 (6) (2) 7 5Share of profit for the year after tax . . . . . . . . — 0 0 — 0

Balance at December 31, 2005 . . . . . . . . . . . 4 (6) (2) 7 5Share of profit for the year after tax . . . . . . . . — 1 1 — 1

Balance at December 31, 2006 . . . . . . . . . . . 4 (5) (1) 7 6Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . 5 — 5 1 6Share of profit for the year after tax . . . . . . . . — — — — —

Balance at December 31, 2007 . . . . . . . . . 9 (5) 4 8 12

There have been no changes recognized directly in the equity of associates that would also berecognized directly in equity by the Group.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

The Group’s share of the assets and liabilities of associates accounted for using the equity methodat December 31, 2007 and 2006 and their revenues and profit and loss for 2007, 2006 and 2005 are asfollows:

2007 2006

£ million £ million

Financial positionTotal assets (excluding goodwill) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (5)

Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (1)

2007 2006 2005

£ million £ million £ million

Results of operationsRevenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3 2Profit in the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 0

Associates carried at fair value through profit and loss

The Group’s associates that are carried at fair value through profit and loss comprise investments inOEICs, unit trusts, funds holding collateralized debt obligations, property unit trusts, and venture capitalinvestments of the PAC with-profits fund managed by PPM Capital, where the Group has significantinfluence. These investments are incorporated both in the UK and overseas, and some have year endswhich are non-coterminous with that of the Group. In these instances, the investments are recorded atfair value at December 31, 2007 based on valuations or pricing information at that specific date. Theaggregate fair value of associates carried at fair value through profit and loss where there are publishedprice quotations is approximately £2 billion (2006: £2 billion) at December 31, 2007.

The aggregate assets of these associates are approximately £9 billion (2006: £7 billion). Aggregateliabilities, excluding liabilities to unit holders and shareholders for unit trusts and OEICs, areapproximately £2 billion (2006: £3 billion). Fund revenues, with revenue arising in unit trusts and OEICsdeemed to constitute the investment return for these vehicles, were approximately £0.5 billion (2006:£0.4 billion) and net profit in the year, excluding unit trusts and OEICs where all investment returnsaccrue to unit holders or shareholders respectively, was approximately £0.2 billion (2006: £0.2 billion).

Investments in joint ventures

Joint ventures represent activities over which the Group exercises joint control through contractualagreement with one or more parties. The Group’s significant joint ventures, which are accounted for

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

using proportionate consolidation, comprise various joint ventures relating to property investmentswhere the Group has a 50 per cent interest as well as the following interests:

Investment % held Principal activity Country

ICICI Prudential Life Insurance Company Limited . . . . . 26 Life assurance IndiaBOCI—Prudential Asset Management Limited . . . . . . . 36 Pensions ChinaPruHealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Private medical insurance UKCITIC—Prudential Life Insurance Company Limited . . . . 50 Life assurance ChinaCITIC Prudential Fund Management Company Limited . . 49 Asset management ChinaPrudential ICICI Asset Management Company Limited . . 49 Asset management IndiaPrudential BSN Takaful Berhad . . . . . . . . . . . . . . . . . 49 General and life insurance Malaysia

In August 2007, the Group increased its stake in CITIC Prudential Fund Management CompanyLimited from 33 per cent to 49 per cent.

On September 29, 2007, following the change in management of the operation in accordance withthe original agreement, CITIC—Prudential Life Insurance Company Limited has been accounted for as ajoint venture. Prior to the change in management agreement CITIC—Prudential Life Insurance CompanyLimited was accounted for as a subsidiary undertaking. Whilst the management agreement has beenrevised there has been no change in the Group’s level of holding.

Prudential BSN Takaful Berhad was a new joint venture in 2006.

In January 2006, the Group sold its 50 per cent interest in Marlborough Stirling Mortgage ServicesLimited for £2.9 million. The profit on sale before tax of £1.7 million was included in investment incomein the consolidated income statement.

The investments noted in the table above have the same accounting year end as the Group, exceptfor Prudential ICICI Asset Management Company Limited. Although this investment has a reportingperiod of 31 March, 12 months of financial information up to December 31 is recorded. Accordingly, theinformation is deemed to cover the same period as that of the Group.

The summarized financial data for the Group’s share of investments in joint ventures is as follows:

2007 2006

£ million £ million

Financial positionCurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,277 91Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 638

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,450 729

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (115) (47)Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,121) (467)

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,236) (514)

Net equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 215

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

2007 2006 2005

£ million £ million £ million

Results of operationsRevenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500 265 156Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (546) (273) (161)

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46) (8) (5)

There are several minor service agreements in place between the joint ventures and the Group.During 2007, the aggregate amount of the transactions was £5.4 million and the balance outstanding asat December 31, 2007 was £4.7 million.

During 2006, ICICI Prudential Life Insurance Company Limited invested its own capital of£1.4 million into the joint venture to fund the operational needs of the business.

The joint ventures have no significant contingent liabilities to which the Group is exposed nor doesthe Group have any significant contingent liabilities in relation to its interest in the joint ventures.

H9: Assets and liabilities held for sale

Assets and liabilities held for sale comprise investment property and consolidated venturesubsidiaries of the PAC with-profits fund.

Investment properties are classified as held for sale when contracts have been exchanged but thesale has not been completed at the period end.

As at December 31, 2006, one venture subsidiary, Pharmacia Diagnostics, was classified as held forsale. The disposal of this subsidiary was completed on January 18, 2007.

Gains on disposal of held for sale assets and liabilities are recorded in ‘investment income’ withinthe income statement.

Major classes of assets and liabilities held for sale are as follows:

2007 2006

£ million £ million

AssetsGoodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 138Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 112Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 48Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 105Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 60

Non-current assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 463

LiabilitiesOther liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 64Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 323

Non-current liabilities held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 387

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H10: Cash and cash equivalents

Cash and cash equivalents consist of cash in hand, balances with banks, and certain short-termdeposits and debt instruments. Cash and cash equivalents included in the cash flow statement comprisethe following balance sheet amounts:

2007 2006

£ million £ million

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,528 3,902Cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 260

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,951 4,162Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 909

Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,951 5,071

Cash and cash equivalents held in the parent company and finance subsidiaries are considered to beavailable for use by the Group. These funds amount to £339 million and £437 million in 2007 and 2006,respectively. The remaining amounts, generally not available for use by the Group, include cash and cashequivalents held for the benefit of policyholders and, in 2006, loans and advances to banks held by Egg.

H11: Shareholders’ equity: Share capital, share premium and reserves

The authorized share capital of the Company is £220 million (2006: £220 million) (divided into4,000,000,000 (2006: 4,000,000,000) ordinary shares of 5 pence each and 2,000,000,000 sterlingpreference shares of 1 pence each) and US$20 million (divided into 2,000,000,000 US dollar preferenceshares of 1 cent each) and Euros 20 million (divided into 2,000,000,000 Euro preference shares of1 cent each). None of the preference shares have been issued. A summary of the ordinary shares inissue is set out below:

2007 2006

£ million £ million

Share capital and share premiumOrdinary share capital: 2,470 million (2006: 2,444 million)Shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 122Share premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,828 1,822ReservesRetained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,440 3,640Translation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112) (125)Available-for-sale and hedging reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (78) 29

Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,201 5,488

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Share capital and share premium

Number of Share Shareordinary shares capital premium

£ million £ million

2006Issued shares of 5p each fully paid:

At the beginning of the year . . . . . . . . . . . . . . . . . . . . . . 2,386,784,266 119 1,564Shares issued under share option schemes . . . . . . . . . . . . 2,953,552 — 15Shares issued in lieu of cash dividends . . . . . . . . . . . . . . . 12,940,993 1 75Shares issued in respect of acquisition of Egg minority

interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,633,614 2 243Transfer to retained earnings in respect of shares issued

in lieu of cash dividends . . . . . . . . . . . . . . . . . . . . . . . — — (75)

At end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,444,312,425 122 1,822

2007Issued shares of 5p each fully paid:

At the beginning of the year . . . . . . . . . . . . . . . . . . . . . . 2,444,312,425 122 1,822Shares issued under share option schemes . . . . . . . . . . . . 803,818 — 6Shares issued in lieu of cash dividends . . . . . . . . . . . . . . . 24,900,997 1 175Transfer to retained earnings in respect of shares issued

in lieu of cash dividends . . . . . . . . . . . . . . . . . . . . . . . — — (175)

At end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,470,017,240 123 1,828

Amounts recorded in share capital represent the nominal value of the shares issued. The differencebetween the proceeds received on issue of shares, net of issue costs, and the nominal value of sharesissued is credited to the share premium account.

At December 31, 2007, there were options outstanding under Save As You Earn schemes tosubscribe for 9,017,442 (2006: 10,722,274) shares at prices ranging from 266 pence to 695 pence(2006: 266 pence to 715 pence) and exercisable by the year 2014 (2013). In addition, there are2,037,220 (2006: 4,113,481) conditional options outstanding under the RSP and 3,485,617 (2006:1,623,637) under the GPSP exercisable at nil cost within a 10-year period.

The cost of own shares of £60 million as at December 31, 2007 (2006: £79 million) is deductedfrom retained earnings. The Company has established trusts to facilitate the delivery of shares underemployee incentive plans and savings-related share option schemes. At December 31, 2007, 6.6 million(2006: 7.5 million) Prudential plc shares with a market value of £47 million (2006: £52 million) wereheld in such trusts. In 2007, the Company purchased 1.2 million (2006: 2.3 million) shares in respect ofemployee incentive plans at a cost of £9 million (2006: £15 million). The maximum number of sharesheld in the year was 8.5 million which was at the beginning of the year. Of this total, 5.1 million (2006:4.8 million) shares were held in trusts under employee incentive plans.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Of the total shares held in trust, 1.5 million (2006: 2.7 million) shares were held by a qualifyingemployee share ownership trust. These shares are expected to be fully distributed in the future onmaturity of savings-related share option schemes at a weighted average exercise price of 274 pence(2006: 303 pence).

The Group has consolidated a number of authorized investment funds where it is deemed to controlthese funds under IFRS. Certain of these funds hold shares in Prudential plc. The total number of sharesheld by these funds at December 31, 2007 was 4.1 million (2006: 4.9 million) and the cost of acquiringthese shares of £22 million (2006: £26 million) is included in cost of own shares. The market value ofthese shares as at December 31, 2007 was £29 million (2006: £34 million).

Reserves

The translation reserve represents cumulative foreign exchange translation differences taken directlyto equity in accordance with IFRS, net of related tax. In accordance with IFRS 1, cumulative translationdifferences are deemed to be zero at January 1, 2004, the date of transition to IFRS.

The hedging reserve consists of the portion of the cash flow hedge that is determined to be aneffective hedge, net of related tax. The available-for-sale reserve includes gains or losses arising fromchanges in fair value of available-for-sale securities, net of related tax.

H12: Insurance contract liabilities and unallocated surplus of with-profits funds

Movement in year

UnallocatedInsurance surplus ofcontract with-profitsliabilities funds

£ million £ million

At January 1, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,436 11,330Income and expense included in the income statement . . . . . . . . . . . . . . . . 7,811 2,296Foreign exchange translation differences . . . . . . . . . . . . . . . . . . . . . . . . . . (5,034) (27)

At December 31, 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,213 13,599

At January 1, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,213 13,599Income and expense included in the income statement . . . . . . . . . . . . . . . . 9,590 760Foreign exchange translation differences . . . . . . . . . . . . . . . . . . . . . . . . . . (167) (8)

At December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,636 14,351

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H13: Borrowings

Core structural borrowings of shareholder-financed operations

Innovative Lower 2007 2006Tier 1* Tier 2* Senior† Total Total

£ million £ million £ million £ million £ million

Central companiesSubordinated debt:

e500m 5.75% Subordinated Notes 2021(note i) . . . . . . . . . . . . . . . . . . . . . . . . . 365 365 335

e20m Medium-Term Subordinated Notes 2023(note ii) . . . . . . . . . . . . . . . . . . . . . . . . 15 15 13

£435m 6.125% Subordinated Notes 2031 . . . . 427 427 427US$1,000m 6.5% Perpetual Subordinated

Capital Securities (note iii) . . . . . . . . . . . . 485 485 484US$250m 6.75% Perpetual Subordinated

Capital Securitie (note iv) . . . . . . . . . . . . . 124 124 125US$300m 6.5% Perpetual Subordinated

Capital Securitie (notes iv and v) . . . . . . . . 154 154 154

763 807 — 1,570 1,538Senior debt:

£150m 9.375% Guaranteed Bonds 2007 . . . . . — 150£249m 5.5% Bonds 2009 . . . . . . . . . . . . . . 248 248 248£300m 6.875% Bonds 2023 . . . . . . . . . . . . . 300 300 300£250m 5.875% Bonds 2029 . . . . . . . . . . . . . 249 249 249

— — 797 797 947

Total central companies . . . . . . . . . . . . . . . 763 807 797 2,367 2,485US operations

US$250m 8.15% Surplus Notes 2 (note vi) . . . 125 125 127

Total continuing operations . . . . . . . . . . . . . 763 932 797 2,492 2,612Discontinued banking operations

£250m 7.5% Subordinated Notes 2013 . . . . . . — 250£200m 6.875% Subordinated Notes 2021 . . . . — 201

— — — — 451

Total (note vii) . . . . . . . . . . . . . . . . . . . . . . 763 932 797 2,492 3,063

* These debt classifications are consistent with the treatment of capital for regulatory purposes, as defined in the FSAHandbook.

† The senior debt ranks above subordinated debt in the event of liquidation.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Notes(i) The e500 million 5.75 per cent borrowings have been swapped into borrowings of £333 million with interest payable at six

month £Libor plus 0.962 per cent.

(ii) The e20 million Medium-Term Subordinated Notes were issued at 20-year Euro Constant Maturity Swap (capped at 6.5 percent). These have been swapped into borrowings of £14 million with interest payable at three month £Libor plus 1.2 per cent.

(iii) Interest on the US$1,000 million 6.5 per cent borrowings was swapped into floating rate payments at three month US$Liborplus 0.80 per cent. In January 2008, this was swapped back into fixed rate payments at 6.5 per cent.

(iv) The US$250 million 6.75 per cent borrowings and the US$300 million 6.5 per cent borrowings can be converted, in whole orin part, at the Company’s option and subject to certain conditions, on any interest payment date falling on or after March 23,2010 and March 23, 2011 respectively, into one or more series of Prudential preference shares.

(v) Interest on the US$300 million 6.5 per cent borrowings was swapped into floating rate payments at three month US$Liborplus 0.0225 per cent. In January 2008, this was swapped back into fixed rate payments at 6.5 per cent.

(vi) The Surplus Notes are unsecured and subordinated to all present and future indebtedness, policy claims and other creditorclaims of the US operations.

(vii) Maturity analysis

The following table sets out the maturity analysis of the Group’s core structural borrowings:

2007 2006

£ million £ millionLess than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1501 to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248 —2 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2483 to 4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —4 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,244 2,665

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,492 3,063

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Operational borrowings attributable to shareholder-financed operations

2007 2006

£ million £ million

Borrowings in respect of short-term fixed income securities programmesCommercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,422 2,017Floating Rate Notes 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5Medium-Term Notes 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 —Medium-Term Notes 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10

2,477 2,032

Non-recourse borrowings of US operations (note i)Jackson (note ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 —Investment subsidiaries (note iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 76Piedmont and CDO funds (note iv) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 456 667

591 743

Other borrowingsBank loans and overdrafts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9Obligations under finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 6

13 15

Total continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081 2,790Discontinued banking operations (note v) . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,819

Total (note vi) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081 5,609

Notes(i) In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the

assets of those subsidiaries and funds.

(ii) This represents senior debt issued through the Federal Home Loan Bank of Indianapolis and is secured on collateral postedwith FHLB by Jackson. The interest rate on this debt is variable based on a market rate and was 4.45 per cent atDecember 31, 2007.

(iii) In 2006, this constituted senior and subordinated notes and mortgage loans. During 2007, the notes were repaid.

(iv) Piedmont is an investment trust investing in certain asset-backed and mortgage-backed securities in the US. These borrowingspertain to debt instruments issued to external parties.

(v) The borrowings in respect of banking operations comprise deposits by banks of £nil (2006: £2,220 million) andunsubordinated debt securities issued by Egg of £nil (2006: £599 million). The deposits by banks mainly relate tosecuritization of credit card receivables. See also note G4.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

(vi) Maturity analysis

The following table sets out the maturity analysis of the Group’s operational borrowings attributable to shareholder-financedoperations:

2007 2006

£ million £ millionLess than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,618 3,1351 to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 5332 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9463 to 4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 2664 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 48Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 412 681

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,081 5,609

Borrowings attributable to with-profits funds

2007 2006

£ million £ million

Non-recourse borrowings of venture fund investment subsidiarie (note i) . . . . . . . — 926Non-recourse borrowings of consolidated investment fund (note i) . . . . . . . . . . . 789 681£100m 8.5% Undated Subordinated Guaranteed Bonds of Scottish Amicable

Finance plc (note ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 100Other borrowings (predominantly obligations under finance leases) . . . . . . . . . . . 98 69

Total (note iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987 1,776

Notes(i) In all instances the holders of the debt instruments issued by these subsidiaries and funds do not have recourse beyond the

assets of those subsidiaries and funds.

(ii) The interests of the holders of the bonds issued by Scottish Amicable Finance plc, a subsidiary of the Scottish AmicableInsurance Fund, are subordinate to the entitlements of the policyholders of that fund.

(iii) Maturity analysis

The following table sets out the maturity analysis of the Group’s borrowings attributable to with-profits funds:

2007 2006

£ million £ millionLess than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103 331 to 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 122 to 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 —3 to 4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 3194 to 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154 —Over 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 652 1,412

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987 1,776

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H14: Provisions and contingencies

Provisions

2007 2006

£ million £ million

Provision in respect of defined benefit pension schemes: (note I1)(Surplus) deficit, gross of deferred tax, based on scheme assets held, including

investments in Prudential insurance policies:Attributable to PAC with-profits fund (i.e. absorbed by the liability for

unallocated surplus) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (73)Attributable to shareholder-financed operations (i.e. to shareholders’ equity) . . 54 8

81 (65)Add back: Investments in Prudential insurance policies . . . . . . . . . . . . . . . . . 172 287

Provision after elimination of investments in Prudential insurance policies andmatching policyholder liability from Group balance sheet . . . . . . . . . . . . . . . 253 222

Other provisions (see below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 238

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 460Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 4

Total provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 473 464

The pension deficit does not include amounts relating to the PSPS pension scheme for 2007. Theseamounts are included in the accrued investment income and the other debtors note on H5.

Analysis of other provisions:

2007 2006

£ million £ million

At January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 175Charged to income statement:

Additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 161Unused amounts reversed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) (13)

Used during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (112) (81)Exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (4)

At December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 238

Comprising:Legal provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 11Restructuring provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 72Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 155

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 238

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Of the other provisions balance, £77 million (2006: £55 million) is expected to be settled withinone year. Employer contributions expected to be paid into defined benefit pension schemes within oneyear are shown in note I1.

Legal provisions

The legal provisions of £19 million (2006: £11 million) relate predominantly to Jackson. Jackson hasbeen named in civil proceedings, which appear to be substantially similar to other class action litigationbrought against many life insurers in the US, alleging misconduct in the sale of insurance products.During 2007, an additional provision of £12 million was made and £4 million was paid.

Restructuring provisions

Restructuring provisions of £35 million (2006: £76 million) comprise £35 million (2006: £72 million)relating to restructuring activity of UK insurance operations and £nil (2006: £4 million) relating todiscontinued banking operations.

UK restructuring

In 2004 and 2005, Prudential implemented restructurings relating to document management review,streamlining operations, and the relocation of activities to an offshore base in India. In December 2005,the Group announced an initiative for UK insurance operations to work more closely with Egg and M&Gand in the process facilitate the realization of substantial annualized pre-tax cost savings andopportunities for revenue synergies.

At January 1, 2006, a provision of £30 million was brought forward ,and during 2006 an additional£75 million was provided, £4 million of unused provision was released, and £29 million was paid.

During 2007, an additional provision of £21 million was provided, £14 million of unused provisionwas released, and £44 million was paid.

On November 28, 2007 Prudential UK announced it had entered into a partnership agreement withCapita Group Plc (‘Capita’) to outsource a large proportion of its in-force and new business policyadministration. Under the terms of the proposed agreement, Capita will provide customer servicing,policy administration, new business processing, claims activity and related IT support to Prudential UK.

Discontinued banking operations restructuring

Following the disposal of Egg in 2007 there was no provision held at December 31, 2007. In 2006,as a result of the UK and Egg initiative described above, a provision of £1 million was brought forwardrelating to Egg’s withdrawal from the French market, and during 2006 an additional £11 million wasprovided, of which £8 million was used.

Other provisions

Other provisions of £166 million (2006: £155 million) include provisions of £155 million(2006: £134 million) relating to staff benefit schemes. During 2007, another £78 million was provided,£3 million of unused provision was released and £54 million was paid. In 2006, a provision of

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

£94 million was brought forward, an additional £78 million was provided, £7 million of unused provisionwas released and £31 million was paid. Other provisions also include £11 million (2006: £18 million)relating to various onerous contracts where, in 2007, an additional £2 million was provided, £1 million ofunused provision was released and £8 million was used. In 2006, £19 million was brought forward,£1 million was provided and £2 million was used. The remaining provisions of £3 million in 2006 includeVAT provisions.

Contingencies and related obligations

Litigation

In addition to the legal proceedings relating to Jackson mentioned above, the Group is involved inother litigation and regulatory issues arising in the ordinary course of business. Whilst the outcome ofsuch matters cannot be predicted with certainty, the directors believe that the ultimate outcome of suchlitigation and regulatory issues will not have a material adverse effect on the Group’s financial condition,results of operations, or cash flows.

Pension mis-selling review

In 1988, the UK government introduced new pensions legislation intended to encourage moreindividuals to make their own arrangements for their pensions. During the period from April 1988 toJune 1994, many individuals were advised by insurance companies, Independent Financial Advisers andother intermediaries to not join, to transfer from or to opt out of their occupational pension schemes infavor of private pension products introduced under the UK Income and Corporation Taxes Act 1988. TheUK insurance regulator (previously the Personal Investment Authority, now the FSA), subsequentlydetermined that many individuals were incorrectly advised and would have been better off notpurchasing the private pension products sold to them. Industry participants are responsible forcompensating the persons to whom private pensions were mis-sold. As a result, the FSA required thatall UK life insurance companies review their potential cases of pension mis-selling and pay compensationto policyholders where necessary and, as a consequence, record a provision for the estimated costs. TheGroup met the requirement of the FSA to issue offers to all cases by June 30, 2002.

The table below summarizes the change in the pension mis-selling provision for the years endedDecember 31, 2007 and 2006. The change in the provision is included in benefits and claims in theincome statement and the movement in unallocated surplus of with-profits funds has been determinedaccordingly.

2007 2006

£ million £ million

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 331Changes to actuarial assumptions and method of calculation . . . . . . . . . . . . . . . 71 108Discount unwind . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 15Redress to policyholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (41) (48)Payment of administrative costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (5)

Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 448 401

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

The pension mis-selling provision is included within the liabilities in respect of investment contractswith discretionary participation features under IFRS 4.

The pension mis-selling provision at December 31, 2007 set out above of £448 million isstochastically determined on a discounted basis. The average discount rate implied in the movement inthe year is 4.6 per cent. The undiscounted amounts at December 31, 2007 expected to be paid in eachof the years ending December 31 are as follows:

2007

£ million

Year ended December 312008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 707

Total undiscounted amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825Aggregate discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (377)

Discounted pension mis-selling provision at December 31, 2007 . . . . . . . . . . . . . . . . . . . . 448

The liability accounting for the contracts which are the subject of the mis-selling provision isreflected in two elements, namely the core policyholder liability determined on the basis applied forother contract liabilities and the mis-selling provision. The overall liability for these contracts remainsappropriate in the context of the accounting for policyholder liabilities that determines the calculation ofboth elements. However, the constituent elements are reallocated and remeasured for the changesarising from the application of the realistic Peak 2 basis of liabilities for the core policyholder liability, asreflected in the IFRS policy improvement to apply the UK GAAP standard FRS 27 as described in sectionA4.

The FSA periodically updates the actuarial assumptions to be used in calculating the provision,including interest rates and mortality assumptions. The pension mis-selling provision represents thediscounted value of future expected payments, including benefit payments and all internal and externallegal and administrative costs of adjudicating, processing and settling those claims. To the extent thatamounts have not been paid, the provision increases each year reflecting the shorter period of discount.

The directors believe that, based on current information, the provision, together with futureinvestment return on the assets backing the provision, will be adequate to cover the costs of pensionmis-selling as well as the costs and expenses of the Group’s pension review unit established to identifyand settle such cases. Such provision represents the best estimate of probable costs and expenses.However, there can be no assurance that the current provision level will not need to be increased.

The costs associated with the pension mis-selling review have been met from the inherited estate.Accordingly, these costs have not been charged to the asset shares used in the determination ofpolicyholder bonus rates. Hence policyholders’ pay-out values have been unaffected by pensionmis-selling.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

In 1998, Prudential stated that deducting mis-selling costs from the inherited estate would notimpact its bonus or investment policy and it gave an assurance that if this unlikely event were to occur,it would make available support to the fund from shareholder resources for as long as the situationcontinued, so as to ensure that policyholders were not disadvantaged. The assurance was designed toprotect both existing policyholders at the date it was announced, and policyholders who subsequentlypurchased policies while the pension mis-selling review was continuing.

This review was completed on June 30, 2002. The assurance will continue to apply to any policy inforce at December 31, 2003, both for premiums paid before January 1, 2004, and for subsequentregular premiums (including future fixed, RPI or salary related increases and Department of Work andPensions rebate business). The assurance has not applied to new business since January 1, 2004. Newbusiness in this context consists of new policies, new members to existing pension schemes plus regularand single premium top-ups, transfers and switches to existing arrangements. The maximum amount ofcapital support available under the terms of the assurance will reduce over time as claims are paid onthe policies covered by it.

The bonus and investment policy for each type of with-profits policy is the same irrespective ofwhether or not the assurance applies. Hence removal of the assurance for new business has had noimpact on policyholder returns and this is expected to continue for the foreseeable future.

Mortgage endowment products review

In common with several other UK insurance companies, the Group used to sell low-cost endowmentproducts related to repayment of residential mortgages. At sale, the initial sum assured is set at a levelsuch that the projected benefits, including an estimate of the annual bonus receivable over the life ofthe policy, will equal or exceed the mortgage debt. Because of a decrease in expected future investmentreturns since these products were sold, the FSA is concerned that the maturity value of some of theseproducts will be less than the mortgage debt. The FSA has worked with insurance companies to devisea programme whereby the companies write to customers indicating whether they may have a possibleshortfall and outline the actions that the customers can take to prevent this possibility.

The Group is exposed to mortgage endowment products in respect of policies issued by ScottishAmicable Life plc (SAL) and policies issued by Scottish Amicable Life Assurance Society (SALAS) whichwere transferred into SAIF. At December 31, 2007, provisions of £5 million (2006: £5 million) in SALand £43 million (2006: £45 million) in SAIF were held to cover potential compensation in respect ofmortgage endowment product mis-selling claims. As SAIF is a separate sub-fund of the PrudentialAssurance long-term business fund, this provision has no impact on shareholders.

In addition, in the year ended December 31, 2007 Prudential Assurance’s main with-profits fundpaid compensation of £5 million (2006: £11 million) in respect of mortgage endowment productsmis-selling claims and at December 31, 2007 held a provision of £55 million (2006: £60 million) inrespect of further compensation. The movement in this provision has no impact on the Group’s profitbefore tax.

In May 2006, the Group introduced a deadline for both Prudential and Scottish Amicable mortgageendowment complaints. Impacted customers have three years to lodge a mis-selling complaint in linewith the time limit prescribed by the FSA and the ABI.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

Guaranteed annuities

Prudential Assurance used to sell guaranteed annuity products in the UK and at December 31, 2007held a provision of £45 million (2006: £47 million) within the main with-profits fund to honor guaranteeson these products. The Group’s main exposure to guaranteed annuities in the UK is through SAIF and atDecember 31, 2007 a provision of £563 million (2006: £561 million) was held in SAIF to honor theguarantees. As SAIF is a separate sub-fund of the Prudential Assurance long-term business fund, themovement in this provision has no impact on shareholders.

Other matters

Inherited estate of the PAC long-term fund

The assets of the main with-profits fund within the long-term fund of PAC comprise the amountsthat it expects to pay out to meet its obligations to existing policyholders and an additional amount usedas working capital. The amount payable over time to policyholders from the with-profits fund is equal tothe policyholders’ accumulated asset shares plus any additional payments that may be required by wayof smoothing or to meet guarantees. The balance of the assets of the with-profits fund is called the‘inherited estate’ and has accumulated over many years from various sources.

The inherited estate represents the major part of the working capital of PAC’s long-term insurancefund. This enables PAC to support with-profits business by providing the benefits associated withsmoothing and guarantees, by providing investment flexibility for the fund’s assets, by meeting theregulatory capital requirements that demonstrate solvency and by absorbing the costs of significantevents or fundamental changes in its long-term business without affecting the bonus and investmentpolicies. The size of the inherited estate fluctuates from year to year depending on the investmentreturn and the extent to which it has been required to meet smoothing costs, guarantees and otherevents.

PAC believes that it would be beneficial if there were greater clarity as to the status of the inheritedestate. As a result, PAC has announced that it has begun a process to determine whether it can achievethat clarity through a reattribution of the inherited estate. As part of this process a PolicyholderAdvocate has been nominated to represent policyholders’ interests. This nomination does not mean thata reattribution will occur.

Given the size of the Group’s with-profits business any proposal is likely to be time consuming andcomplex to implement and is likely to involve a payment to policyholders from shareholders’ funds. If areattribution is completed, the inherited estate will continue to provide working capital for the long-terminsurance fund.

Support for long-term business funds by shareholders’ funds

As a proprietary insurance company, the Group is liable to meet its obligations to policyholderseven if the assets of the long-term funds are insufficient to do so. The assets, represented by the‘unallocated surplus of with-profits funds’, in excess of amounts expected to be paid for future terminalbonuses and related shareholder transfers (the excess assets) in the long-term funds could be materiallydepleted over time by, for example, a significant or sustained equity market downturn, costs of

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

significant fundamental strategic change or a material increase in the pension mis-selling provision. Inthe unlikely circumstance that the depletion of the excess assets within the long-term fund was suchthat the Group’s ability to satisfy policyholders’ reasonable expectations was adversely affected, it mightbecome necessary to restrict the annual distribution to shareholders or to contribute shareholders’ fundsto the long-term funds to provide financial support.

In 1997, the business of SALAS, a mutual society, was transferred to Prudential Assurance. Ineffecting the transfer, a separate sub-fund, SAIF, was established within Prudential Assurance’s long-termbusiness fund. This sub-fund contains all the with-profits business and all other pension business thatwas transferred. No new business has been or will be written in the sub-fund and the sub-fund ismanaged to ensure that all the invested assets are distributed to SAIF policyholders over the lifetime ofSAIF policies. With the exception of certain amounts in respect of the unitized with-profits life business,all future earnings arising in SAIF are retained for SAIF policyholders. Any excess (deficiency) of revenueover expense within SAIF during a period is offset by a transfer to (from) the SAIF unallocated surplus.Shareholders have no interest in the profits of SAIF but are entitled to the asset management fees paidon this business. With the exception of certain guaranteed annuity products mentioned earlier in thisnote, and certain products which include a minimum guaranteed rate of accumulation, the majority ofSAIF with-profits policies do not guarantee minimum rates of return to policyholders.

Should the assets of SAIF be inadequate to meet the guaranteed benefit obligations to thepolicyholders of SAIF, the Prudential Assurance long-term fund would be liable to cover any suchdeficiency. Due to the quality and diversity of the assets in SAIF and the ability of SAIF to reviseguaranteed benefits in the event of an asset shortfall, the directors believe that the probability of eitherthe Prudential Assurance long-term fund or the Group’s shareholders’ funds having to contribute to SAIFis remote.

Guarantees and commitments

Guarantee funds in both the UK and the US provide for payments to be made to policyholders onbehalf of insolvent life insurance companies. These guarantee funds are financed by payments assessedon solvent insurance companies based on location, volume and types of business. The Group estimatedits reserve for future guarantee fund assessments for Jackson to be £9 million at December 31, 2007(2006: £9 million). Similar assessments for the UK businesses were not significant. The directors believethat the reserve is adequate for all anticipated payments for known insolvencies.

At December 31, 2007, Jackson has unfunded commitments of £181 million (2006: £174 million)related to its investments in limited partnerships and of £104 million (2006: £38 million) related tocommercial mortgage loans. These commitments were entered into in the normal course of business andthe directors do not expect a material adverse impact on the operations to arise from them.

The Group has provided other guarantees and commitments to third parties entered into in thenormal course of business but the directors do not consider that the amounts involved are significant.

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Notes to the Consolidated Financial Statements

December 31, 2007

H: Other information on balance sheet items (Continued)

H15: Other liabilities

2007 2006

£ million £ million

Creditors arising from direct insurance and reinsurance operations . . . . . . . . . . . . 538 521Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 89Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,080 510Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 378

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,871 1,498Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 154

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,871 1,652

I: Other notes

I1: Staff and pension plans

(a) Staff and employment costs

The average number of staff employed by the Group during the year were:

2007 2006 2005

Business operations:UK operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,732 8,259 8,244US operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,123 2,863 2,588Asian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,807 12,114 9,652

Venture fund investment subsidiaries of the PAC with-profits fund (seebelow) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,184 8,898 8,713

Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,846 32,134 29,197Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . 770 2,655 2,464

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,616 34,789 31,661

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

The costs of employment for continuing operations were:

2007 2006 2005

£ million £ million £ million

Business operations:Wages and salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 819 761 706Social security costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 58 56Other pension costs (see below) . . . . . . . . . . . . . . . . . . . . . . . . . . 62 67 73Pension actuarial gains credited to income statement . . . . . . . . . . . . (296) (469) (155)

(234) (402) (82)Venture fund investment subsidiaries of the PAC with-profits fund (see

below) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 423 230 206

Total for continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,070 647 886Discontinued banking operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 76 105

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,091 723 991

Other pension costs comprises £34 million (2006: £45 million; 2005: £54 million) relating to definedbenefit schemes and £28 million (2006: £22 million; 2005: £19 million) relating to defined contributionschemes of continuing operations. Of the defined contribution scheme costs, £19 million (2006:£14 million; 2005: £13 million) related to overseas defined contribution schemes. The £34 million (2006:£45 million; 2005: £54 million) comprises a £14 million (2006: £29 million; 2005: £43 million) charge onan economic basis, reflecting the total assets of the schemes, and a further £20 million (2006:£16 million; 2005; £11 million) charge to adjust for amounts invested in Prudential insurance policies toarrive at the IAS 19 basis charge. The £296 million (2006: £469 million; 2005: £155 million) of actuarialgains comprises £295 million (2006: £485 million; 2005: £171 million) of actuarial gains on an economicbasis and £1 million actuarial gain (2006: £16 million actuarial losses; 2005: £16 million actuarial losses)for amounts invested in Prudential insurance policies. The derivation of these amounts is shown innote (b)(i)7 below.

Of the £423 million (2006: £230 million; 2005: £206 million) costs of employment for venture fundinvestment subsidiaries, £349 million (2006: £189 million; 2005: £169 million) relates to wages andsalaries, £70 million (2006: £27 million; 2005: £31 million) relates to social security costs and £4 million(2006: £14 million; 2005: £6 million) relates to pension costs. Following the change of controlarrangements put in place at the same time as the sale by the Group of PPM Capital in November 2007,the Group no longer controls those venture fund investment subsidiaries managed by the sold entityand consequently has ceased to consolidate these operations subsequent to this, with the averagenumber of staff employed and costs of employment for 2007 detailed above reflecting the period priorto disposal.

Of the £21 million (2006: £76 million; 2005: £105 million) costs of employment for discontinuedbanking operations, £18 million (2006: £64 million; 2005: £93 million) relates to wages and salaries,£2 million (2006: £7 million; 2005: £8 million) relates to social security costs and £1 million (2006:£5 million; 2005; £4 million) relates to pension costs.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

(b) Pension plans

(i) Defined benefit plans

1. Summary

The Group business operations operate a number of pension schemes. The specific features ofthese plans vary in accordance with the regulations of the country in which the employees are located,although they are, in general, funded wholly by the Group and based either on a cash balance formulaor on years of service and salary earned in the last year or years of employment. The largest definedbenefit scheme is the principal UK scheme, namely the Prudential Staff Pension Scheme (PSPS). Eighty-seven per cent (2006: 88 per cent) of the liabilities of the Group defined benefit schemes are accountedfor within PSPs.

The Group also operates two smaller defined benefit schemes for UK employees in respect ofScottish Amicable and M&G activities. For all three schemes the projected unit method was used for themost recent full actuarial valuations. There is also a small defined benefit scheme in Taiwan.

As at December 31, 2007, the shareholders’ share of the surplus for PSPS and the deficits of theother schemes amounted to a £76 million surplus net of related tax relief (2006: £8 million deficit).These amounts are determined after including amounts invested by PSPS and the M&G scheme inPrudential policies as explained later in this note.

Defined benefit schemes in the UK are generally required to be subject to full actuarial valuationevery three years to assess the appropriate level of funding for schemes having regard to theircommitments. These valuations include assessments of the likely rate of return on the assets held withinthe separate trustee administered funds. PSPS was last actuarially valued as at April 5, 2005 and thisvaluation demonstrated the scheme to be 94 per cent funded, with a shortfall of actuarially determinedassets to liabilities of six per cent, representing a deficit of £243 million.

The finalization of the valuation as at April 5, 2005 was accompanied by changes to the basis offunding for the scheme with effect from that date. Deficit funding amounts designed to eliminate theactuarial deficit over a 10 year period have been and are being made based on that valuation. Totalcontributions to the Scheme for deficit funding and employer’s contributions for ongoing service forcurrent employees are expected to be of the order of £70-75 million per annum over a 10-year period.In 2007, total contributions for the year including expenses and augmentations were £82 million (2006:£137 million). The 2006 amount reflected an increased level of contributions for ongoing service anddeficit funding backdated to April 6, 2005 including expenses and augmentations.

Under IAS 19 the basis of valuation differs markedly from the full triennial valuation basis. Inparticular, IAS 19 requires assets of the scheme to be valued at their market value at the year end, whilepension liabilities are required to be discounted at a rate consistent with the current rate of return on ahigh quality corporate bond. As a result, the difference between IAS 19 basis assets and liabilities canbe volatile. For those schemes such as PSPS, which hold a significant proportion of their assets in equityinvestments, the volatility can be particularly significant. On the economic basis (including investmentsof PSPS and the M&G scheme in Prudential policies as assets) for 2007, a £23 million (2006:£28 million) pre-tax shareholder charge to total profits. In addition, included in total profits is a pre-taxshareholder credit of £90 million (2006: £167 million) for net actuarial gains.

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

In addition, also on the economic basis, the PAC with-profits sub-fund was credited £9 million(2006: charge of £1 million) for the aggregate of service cost and net finance income and benefited by£205 million (2006: £318 million) for its share of net actuarial gains on the scheme assets and liabilities.As shareholder profits for the PAC with-profits sub-fund reflects the surplus for distribution, theseamounts are effectively absorbed by an increased charge in the income statement for the transfer to theliability for unallocated surplus.

The actuarial gains primarily represent the difference between actual and expected investmentreturns for the schemes and the reduction in liabilities primarily caused by an increase in the discountrate caused by increases in corporate bond returns, which more than offsets the effects of strengthenedmortality assumptions for the UK pension schemes.

Surpluses and deficits on the Group’s defined benefit schemes are apportioned to the PAC life fundand shareholders’ funds based on estimates of employees’ service between them. At December 31,2005, the deficit of PSPS was apportioned in the ratio 70⁄30 between the life-fund and shareholder-backed operations following detailed consideration of the sourcing of previous contributions. This ratiowas applied to the base deficit position at January 1, 2006 and for the purpose of determining theallocation of the movements in that position up to December 31, 2007. The IAS 19 service charge andongoing employer contributions are allocated by reference to the cost allocation for current activity. Thedeficit of the Scottish Amicable Pension Scheme of £54 million has been allocated 50 per cent to thePAC with-profits fund and 50 per cent to the PAC shareholder fund.

Reflecting these two elements, at December 31, 2007, the total share of the surplus on PSPS andthe deficit on the smaller Scottish Amicable scheme attributable to the PAC with-profits fund amountedto a net surplus of £304 million (2006: £66 million) net of related tax relief.

2. Corporate Governance

The rules of the Group’s largest pension arrangement, the defined benefit section of PSPS, a finalsalary scheme, specify that, in exercising its investment powers, the Trustee’s objective is to achieve thebest overall investment return consistent with the security of the assets of the scheme. In doing this,regard is had to the nature and duration of the scheme’s liabilities. The Trustee sets the benchmark forthe asset mix, following analysis of the liabilities by the Scheme’s Actuary and, having taken advice fromthe Investment Managers, then selects benchmark indices for each asset type in order to measureinvestment performance against a benchmark return.

The Trustee reviews strategy, the asset mix benchmark and the Investment Managers’ objectivesevery three years, to coincide with the Actuarial Valuation, or earlier if the Scheme Actuaryrecommends. Interim reviews are conducted annually based on changing economic circumstances andfinancial market levels.

The Trustee sets the general investment policy and specifies any restrictions on types of investmentand the degrees of divergence permitted from the benchmark, but delegates the responsibility forselection and realization of specific investments to the Investment Managers. In carrying out thisresponsibility, the Investment Managers are required by the Pensions Act 1995 to have regard to theneed for diversification and suitability of investments. Subject to a number of restrictions containedwithin the relevant asset management agreements, the Investment Managers are authorized to invest in

F-195

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

any class of investment asset. However, the Investment Managers will not invest in any new class ofinvestment asset without prior consultation with the Trustee.

The Trustee consults the Principal Employer, the Prudential Assurance Company, on theseinvestment principles, but the ultimate responsibility for the investment of the assets of the scheme lieswith the Trustee.

The investment policies and strategies for the other two UK defined benefit schemes, the M&GGroup Pension Scheme and the Scottish Amicable Staff Pension Scheme, which are both final salaryschemes, follow similar principles, but have different target allocations reflecting the particularrequirements of the schemes.

3. Assumptions

The actuarial assumptions used in determining benefit obligations and the net periodic benefit costsfor the years ended December 31 were as follows:

2007 2006 2005

% % %

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 5.2 4.8Rate of increase in salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 5.0 4.8Rate of increase of pensions in payment for inflation:

Guaranteed (maximum 5%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 3.0 2.8Guaranteed (maximum 2.5%)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.5 2.5Discretionary* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.5 2.5

Expected returns on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 5.9 6.1

* The rates of 2.5 per cent shown are those for PSPS. Assumed rates of increase of pensions in payment for inflation for allother schemes are 3.3 per cent in 2007 (2006: 3.0 per cent; 2005: 2.8 per cent).

The calculations are based on current actuarially calculated mortality estimates with a specificallowance made for future improvements in mortality, which is broadly in line with that adopted for the92 series of mortality tables prepared by the Continuous Mortality Investigation Bureau of the Instituteand Faculty of Actuaries. In 2007, the mortality assumptions were strengthened by including a floor tothe medium cohort improvements.

The tables used for PSPS at December 31, 2007 were:

Male: 100 per cent PMA92 with CMIR17 improvements to the valuation date and medium cohortimprovements subject to a floor of 1.75% up to the age of 90, decreasing linearly to zero by age of 120(2006: 100 per cent PMA92 with CMIR17 improvements to the valuation date and medium cohortimprovements in future); and

Female: 100 per cent PFA92 with CMIR17 improvements to the valuation date and 75% mediumcohort improvements subject to a floor of 1% up to the age of 90 and decreasing linearly to zero by ageof 120 (2006: 100 per cent PFA92 with CMIR17 improvements to the valuation date and medium cohortimprovements in future).

F-196

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

The assumed life expectancies on retirement at age 60, based on the mortality table used was:

2007 Years 2006 Years

Male Female Male Female

Retiring today . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.2 28.3 25.0 28.1Retiring in 15 years’ time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.7 29.3 26.1 29.1

The mean term of the current PSPS liabilities is around 20 years.

Using external actuarial advice provided by Watson Wyatt Partners for the valuation of PSPS and byAon Limited for the M&G scheme, and internal advice for the Scottish Amicable scheme, the mostrecent full valuations have been updated to December 31, 2007, applying the principles prescribed byIAS 19.

4. Summary financial position

The Group liability in respect of defined benefit pension schemes is as follows:

2007 2006 2005

£ million £ million £ million

Surplus (deficit) included in balance sheet under IAS 19 . . . . . . . . . . . 135 (222) (796)Add back: investments in Prudential insurance policies (offset on

consolidation in the Group financial statements against insuranceliabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 287 253

Economic surplus (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 65 (543)

Economic position:Surplus (deficit), gross of deferred tax, based on scheme assets held,

including investments in Prudential insurance policies:Attributable to the PAC with-profits fund (i.e. absorbed by the

liability for unallocated surplus) . . . . . . . . . . . . . . . . . . . . . . . 338 73 (329)Attributable to shareholder-financed operations (i.e. to shareholders’

equity) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109 (8) (214)

Economic surplus (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 65 (543)

The following disclosures explain the IAS 19 basis of accounting after eliminating investment inPrudential insurance policies on consolidation and the economic position.

F-197

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

5. IAS 19 basis financial position as consolidated

The IAS 19 basis net pensions deficit can be summarized as follows:

2007 2006 2005 2004

£ million £ million £ million £ million

Fair value of plan assets, end of year . . . . . . . . . . . . . . . . . 5,150 4,988 4,622 4,092Present value of funded benefit obligation . . . . . . . . . . . . . . (4,826) (5,023) (5,228) (4,777)

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 (35) (606) (685)Present value of unfunded obligations (M&G scheme)* . . . . . (189) (187) (190) (140)

Surplus (provision) recognized in the balance sheet . . . . . . . . 135 (222) (796) (825)

* The M&G pension scheme assets are invested in Prudential insurance policies. For IFRS accounting purposes, the M&Gscheme is in effect unfunded. Please see above for more details.

2007 2006 2005

£ million £ million £ million

Components of net periodic pension costCurrent service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) (69) (65)Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (265) (255) (257)Expected return on assets—economic basis . . . . . . . . . . . . . . . . . . . . 309 295 279Less: expected return on investments of scheme assets in Prudential

insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) (16) (11)Expected return on assets—IAS 19 basis† . . . . . . . . . . . . . . . . . . . . . 289 279 268

Pension cost charge (as referred to in noteI1a) . . . . . . . . . . . . . . . . . . (34) (45) (54)Actuarial gains—economic basis . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 485 171Less: actuarial gains on investments of scheme assets in Prudential

insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (16) (16)Actuarial gains—IAS 19 basis (as referred to in noteI1a) . . . . . . . . . . . . 296 469 155

Net periodic pension credit (included within acquisition and otheroperating expenditure in the income statement) . . . . . . . . . . . . . . . 262 424 101

† In determining the expected return on plan assets for 2007, the 5.9 per cent rate shown below has been applied to theopening assets.

F-198

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

The long-term expected rate of return has been taken to be the weighted average (by market value)of the long-term expected rates of return on each major asset class shown below:

2007 2006 2005 2004

£ million % £ million % £ million % £ million %

Plan assets (IAS 19 basis)Equity . . . . . . . . . . . . . . . . . . . 1,332 26 1,432 29 2,376 51 2,516 61Bonds . . . . . . . . . . . . . . . . . . . 1,299 25 2,185 44 1,593 35 993 24Properties . . . . . . . . . . . . . . . . 583 11 621 12 575 12 520 13Cash-like investments . . . . . . . . . 1,936 38 750 15 78 2 63 2

Total . . . . . . . . . . . . . . . . . . . . 5,150 100 4,988 100 4,622 100 4,092 100

Prospectivelyfor 2008 2007 2006 2005

% % % %

Long-term expected rate of returnEquity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 7.5 7.1 7.1Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4 4.8 4.5 4.5Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.75 6.8 6.4 6.4Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5 5.0 4.5 4.5

Weighted average long-term expected rate of return . . . . . . . . . . . 6.1 5.9 6.1 6.1

The expected rates of return have been determined by reference to long-term expectations, thecarrying value of the assets and equity and other market conditions at the balance sheet date.

The actual return on plan assets was £282 million (2006: £419 million; 2005: £796 million) on anIAS 19 basis.

None of the scheme assets included shares in Prudential plc or property occupied by the PrudentialGroup.

2007 2006 2005 2004

£ million £ million £ million £ million

Fair value of plan assets, end of year (IAS 19 basis) . . . . . . . 5,150 4,988 4,622 4,092Present value of the benefit obligation, end of year . . . . . . . . (5,015) (5,210) (5,418) (4,917)

Plan assets in surplus (deficit) of benefit obligation . . . . . . . . 135 (222) (796) (825)

Experience adjustments on plan liabilities . . . . . . . . . . . . . . (14) 18 1 (17)Percentage of plan liabilities at December 31 . . . . . . . . . . . . 0.28% (0.35)% (0.02)% 0.35%Experience adjustments on plan assets (IAS 19 basis) . . . . . . (7) 140 527 112Percentage of plan assets at December 31 . . . . . . . . . . . . . . (0.14)% 2.81% 11.42% 2.74%

Total employer contributions expected to be paid into the Group defined benefit schemes for theyear ending December 31, 2008 amounts to £90 million (2007: £93 million; 2006: £85 million).

F-199

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

6. Sensitivity of PSPS financial position to key variables

The table below shows the sensitivity of the PSPS liabilities at December 31, 2007 of £4,361 million(2006: £4,607 million) to changes in discount rates, inflation rates and mortality assumptions.

2007

Assumption Change in assumption Impact on scheme liabilities on IAS 19 basis

Discount rate . . . Decrease by 0.2% from 5.9% to 5.7% Increase scheme liabilities by 3.5%

Discount rate . . . Increase by 0.2% from 5.9% to 6.1% Decrease scheme liabilities by 3.4%

Rate of inflation . Decrease by 0.2% from 3.3% to 3.1% Decrease scheme liabilities by 1.3%with consequent reduction in salaryincreases

Mortality rates . . Reduce rates from 100% of table to 95% Increase liabilities by 1.2%

2006

Assumption Change in assumption Impact on scheme liabilities on IAS 19 basis

Discount rate . . . Decrease by 0.2% from 5.2% to 5.0% Increase scheme liabilities by 3.6%

Discount rate . . . Increase by 0.2% from 5.2% to 5.4% Decrease scheme liabilities by 3.4%

Rate of inflation . Decrease by 0.2% from 3.0% to 2.8% Decrease scheme liabilities by 1.3%with consequent reduction in salaryincreases

Mortality rates . . Reduce rates from 100% of table to 95% Increase liabilities by 1.2%

7. Transfer value of PSPS scheme

At December 31, 2007, it is estimated that the assets of the scheme are broadly sufficient to coverthe liabilities of PSPS on a ‘buyout’ basis including an allowance for expenses. The ‘buyout’ basis refersto a basis that might apply in the circumstance of a transfer to another appropriate financial institution.In making this assessment it has been assumed that a more conservative investment strategy appliestogether with a more prudent allowance for future mortality improvements and no allowance fordiscretionary pension increases.

8. Reconciliation to IAS 19 basis financial position

The economic financial position of the defined benefit pension schemes reflects the total assets ofthe schemes including investments in Prudential policies. This is to be contrasted with the IAS 19 basisassets of the PSPS and M&G schemes, as consolidated into the Group balance sheet, which excludeinvestments in Prudential insurance policies which on the financial statement presentation are offsetagainst policyholder liabilities.

The M&G pension scheme has invested £172 million at December 31, 2007 (2006: £161 million;2005: £147 million) in Prudential insurance policies. Additionally, the PSPS scheme has invested

F-200

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

£140 million at December 31, 2007 (2006: £126 million; 2005: £106 million) in Prudential insurancepolicies. As required by IFRS, this amount of scheme asset is eliminated against the policyholder liabilityand hence, for the purposes of preparing the consolidated balance sheet, the IAS 19 basis net pensionasset (liability) is £312 million (2006: £287 million; 2005: £253 million) lower than the ‘economic basis’surplus of £447 million (2006: ‘economic basis’ surplus of £65 million; 2005: ‘economic basis’ deficit of£543 million).

The change in the present value of the benefit obligation and the change in fair value of the assetsfor the total of the PSPS, Scottish Amicable, M&G and Taiwan schemes over the period were as follows:

IAS 19 basis:change in

IAS 19 basis: Investments presentchange in in Prudential Economic value of Economic

fair value of insurance basis: total benefit basis: net2007 plan assets policies assets obligation obligation

£ million £ million £ million £ million £ million

Fair value of plan assets, beginning ofyear . . . . . . . . . . . . . . . . . . . . . . 4,988 287 5,275 5,275

Present value of benefit obligation,beginning of year . . . . . . . . . . . . . (5,210) (5,210)

4,988 287 5,275 (5,210) 65Service cost—current charge only . . . . (58) (58)Interest cost . . . . . . . . . . . . . . . . . . (265) (265)Expected return on plan assets . . . . . . 289 20 309 309Employee contributions . . . . . . . . . . . 2 1 3 (3) —Employer contributions . . . . . . . . . . . 92 9 101 101Actuarial gains . . . . . . . . . . . . . . . . . (7) (1) (8) 303 295Benefit payments . . . . . . . . . . . . . . . (214) (4) (218) 218 —

Fair value of plan assets, end of year . . 5,150 312 5,462 5,462Present value of benefit obligation, end

of year . . . . . . . . . . . . . . . . . . . . (5,015) (5,015)

Economic basis surplus . . . . . . . . . . . 447

F-201

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

IAS 19 basis:change in

IAS 19 basis: Investments presentchange in in Prudential Economic value of Economic

fair value of insurance basis: total benefit basis: net2006 plan assets policies assets obligation obligation

£ million £ million £ million £ million £ million

Fair value of plan assets, beginning ofyear . . . . . . . . . . . . . . . . . . . . . . 4,622 253 4,875 4,875

Present value of benefit obligation,beginning of year . . . . . . . . . . . . . (5,418) (5,418)

4,622 253 4,875 (5,418) (543)Service cost—current charge only . . . . (69) (69)Interest cost . . . . . . . . . . . . . . . . . . (255) (255)Expected return on plan assets . . . . . . 279 16 295 295Employee contributions . . . . . . . . . . . 1 1 2 (2) —Employer contributions . . . . . . . . . . . 148 4 152 152Actuarial gains . . . . . . . . . . . . . . . . . 140 16 156 329 485Benefit payments . . . . . . . . . . . . . . . (202) (3) (205) 205 —

Fair value of plan assets, end of year . . 4,988 287 5,275 5,275Present value of benefit obligation, end

of year . . . . . . . . . . . . . . . . . . . . (5,210) (5,210)

Economic basis surplus . . . . . . . . . . . 65

F-202

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

IAS 19 basis:change in

IAS 19 basis: Investments presentchange in in Prudential Economic value of Economic

fair value of insurance basis: total benefit basis: net2005 plan assets policies assets obligation obligation

£ million £ million £ million £ million £ million

Fair value of plan assets, beginning ofyear . . . . . . . . . . . . . . . . . . . . . . 4,092 125 4,217 4,217

Present value of benefit obligation,beginning of year . . . . . . . . . . . . . (4,917) (4,917)

4,092 125 4,217 (4,917) (700)Less: PSPS scheme plan assets used to

acquire Prudential insurance policies . (99) 99 — —Service cost—current charge only . . . . (65) (65)Interest cost . . . . . . . . . . . . . . . . . . (257) (257)Expected return on plan assets . . . . . . 268 11 279 279Employee contributions . . . . . . . . . . . 0 1 1 (1) —Employer contributions . . . . . . . . . . . 25 4 29 29Actuarial gains . . . . . . . . . . . . . . . . . 528 16 544 (373) 171Benefit payments . . . . . . . . . . . . . . . (192) (3) (195) 195 —

Fair value of plan assets, end of year . . 4,622 253 4,875 4,875Present value of benefit obligation, end

of year . . . . . . . . . . . . . . . . . . . . (5,418) (5,418)

Economic basis surplus . . . . . . . . . . . (543)

9. Group economic financial position

In assessing the underlying economic position of the Group in respect of the defined benefitpension schemes, two factors need to be taken into account. These are:

(i) The surplus or deficits on the PSPS and Scottish Amicable schemes are partially attributable to thePAC with-profits fund; and

(ii) the IAS 19 basis assets of the PSPS and M&G schemes, as consolidated into the Group balancesheet, exclude investments in Prudential insurance policies.

F-203

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

On the ‘economic basis’, after including the underlying assets represented by the investments inPrudential insurance policies as scheme assets, the balance sheets of the schemes at December 31 were:

2007 2006

Other Otherschemes schemes

PSPS (note iii) Total PSPS (note iii) Total

£ million £ million £ million % £ million £ million £ million %

Equities . . . . . . . . . . . . . . . 1,278 265 1,543 28 1,346 282 1,628 31Bonds . . . . . . . . . . . . . . . . 1,134 249 1,383 25 2,077 182 2,259 43Properties . . . . . . . . . . . . . . 545 54 599 11 580 58 638 12Cash-like investments (note i) . 1,932 5 1,937 36 745 5 750 14

Total value of assets . . . . . . . 4,889 573 5,462 100 4,748 527 5,275 100

Present value of benefitobligations . . . . . . . . . . . . (4,361) (654) (5,015) (4,607) (603) (5,210)

Pre-tax surplus/(deficit)(note ii) . . . . . . . . . . . . . . 528 (81) 447 141 (76) 65

Notes

(i) The PSPS has entered into a derivatives based strategy to match the duration and inflation profile of its liabilities. Thisinvolved a reallocation from other investments to cash-like investments with an interest and inflation swap overlay. In broadterms, the scheme is committed to making a series of payments related to LIBOR on a nominal amount and in return thescheme receives a series of fixed and inflation-linked payments which match a proportion of its liabilities. As at December 31,2007, the nominal value of the interest and inflation swaps amounted to £1.2 billion and £0.7 billion respectively.

(ii) The resulting scheme surplus or deficit arising from the excess of assets over liabilities or vice versa at December 31, 2007comprised surplus of £338 million (2006: surplus of £73 million) attributable to the PAC with-profits fund and surplus of£109 million (2006: deficit of £8 million) attributable to shareholder operations.

(iii) In addition to PSPS, there are two smaller schemes in the UK, the Scottish Amicable Pension Scheme, and the M&G PensionScheme, with a combined deficit at December 31, 2007 of £71 million (2006: £67 million), gross of tax. There is also a smallscheme in Taiwan, which at December 31, 2007 had a deficit of £10 million (2006: £9 million), gross of tax.

The movements in the surplus (deficit) on the ‘economic basis’ between scheme assets andliabilities were:

2007 2006 2005

£ million £ million £ million

Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) (69) (65)Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 152 29Other finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 40 22Actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 485 171

Net increase in surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 382 608 157

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

Estimated pension scheme surplus (deficit) attributable to shareholder operations—economicbasis

Movements on the pension scheme surplus (deficit) (determined on the ‘economic basis’), to theextent attributable to shareholder operations are as follows:

Actuarial gains ContributionsPension attributable to paid by

At beginning charge shareholders shareholder At end2007 of year (note i) (note ii) operations of year

£ million £ million £ million £ million £ million

Gross of tax surplus (deficit) . . . . . . . (8) (23) 90 50 109Related deferred tax . . . . . . . . . . . . — 6 (25) (14) (33)

Net of tax surplus (deficit) . . . . . . . . (8) (17) 65 36 76

Actuarial gains ContributionsPension attributable to paid by

At beginning charge shareholders shareholder At end2006 of year (note i) (note ii) operations of year

£ million £ million £ million £ million £ million

Gross of tax surplus (deficit) . . . . . . . (214) (28) 167 67 (8)Related deferred tax . . . . . . . . . . . . 61 9 (50) (20) 0

Net of tax surplus (deficit) . . . . . . . . (153) (19) 117 47 (8)

Charge forActuarial gains revised Contributions

Pension attributable to estimate of paid byAt beginning charge shareholders PSPS deficit shareholder At end

2005 of year (note i) (note ii) allocation operations of year

£ million £ million £ million £ million £ million £ million

Gross of tax surplus(deficit) . . . . . . . . . . (175) (21) 32 (63) 13 (214)

Related deferred tax . . . 49 6 (9) 19 (4) 61

Net of tax surplus(deficit) . . . . . . . . . . (126) (15) 23 (44) 9 (153)

Notes(i) The pension charge comprises:

2007 2006 2005

£ million £ million £ millionCurrent service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) (69) (65)Finance income (expense):

Interest on pension scheme liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . (265) (255) (257)Expected return on pension scheme assets . . . . . . . . . . . . . . . . . . . . . . . . 309 295 279

44 40 22

Total charge net of finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (29) (43)Less: amount attributable to PAC with-profits fund . . . . . . . . . . . . . . . . . . . . . (9) 1 22

Pension charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) (28) (21)

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

(ii) Actuarial gains and losses

This comprises:2007 2006 2005

£ million £ million £ millionActual less expected return on pension scheme assets . . . . . . . . . . . . . . . . . . . (8) 156 544Experience (losses) gains on scheme liabilities . . . . . . . . . . . . . . . . . . . . . . . (14) 18 1Changes in assumptions underlying the present value of scheme liabilities(a) . . . . . . 317 311 (374)

Total actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 485 171Less: amount attributable to PAC with-profits fund . . . . . . . . . . . . . . . . . . . . . (205) (318) (139)

Actuarial gains and losses attributable to shareholders . . . . . . . . . . . . . . . . . . . 90 167 32

Add: additional loss on change of estimate of allocation of opening 2005 deficitbetween shareholder operations and the PAC with-profits fund . . . . . . . . . . . . — — (63)

Charge for actuarial and other gains and losses attributable to shareholders, includedin profit before tax attributable to shareholders . . . . . . . . . . . . . . . . . . . . . 90 167 (31)

(a) The gains of £317 million relating to changes in assumptions comprises the gains due to changes in economicassumptions of £509 million which are partially offset by a charge of £192 million for the effect of strengthenedmortality assumptions for the UK schemes.

Since shareholder profits in respect of the PAC with-profits fund are a function of the actuariallydetermined surplus for distribution, the overall income statement result is not directly affected by thelevel of pension cost or other expenses attributable to the fund.

Estimated pension scheme surplus (deficit) attributable to PAC with-profits fund—economicbasis

Movements on the pension scheme surplus (deficits) (determined on the ‘economic basis’ underwhich PSPS and M&G scheme assets include investments in Prudential insurance policies) are as follows:

Service Credit forcost less revised

net finance estimate ContributionsAt income Actuarial gains of PSPS paid by PAC

beginning (note i (losses) (note ii deficit with-profits At end2007 of year above) above) allocation fund of year

£ million £ million £ million £ million £ million £ million

Gross of tax surplus (deficit) . 73 9 205 — 51 338Related deferred tax . . . . . . (7) (1) (21) — (5) (34)

Net of tax surplus (deficit) . . 66 8 184 — 46 304

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

Service Credit forcost less revised

net finance estimate ContributionsAt income Actuarial gains of PSPS paid by PAC

beginning (note i (losses) (note ii deficit with-profits At end2006 of year above) above) allocation fund of year

£ million £ million £ million £ million £ million £ million

Gross of tax surplus (deficit) . (329) (1) 318 — 85 73Related deferred tax . . . . . . 33 0 (32) — (8) (7)

Net of tax surplus (deficit) . . (296) (1) 286 — 77 66

Service Credit forcost less revised

net finance estimate ContributionsAt income Actuarial gains of PSPS paid by PAC

beginning (note i (losses) (note ii deficit with-profits At end2005 of year above) above) allocation fund of year

£ million £ million £ million £ million £ million £ million

Gross of tax surplus (deficit) . (525) (22) 139 63 16 (329)Related deferred tax . . . . . . 53 2 (14) (6) (2) 33

Net of tax surplus (deficit) . . (472) (20) 125 57 14 (296)

The charges and credits for service cost, net finance income, and actuarial gains and losses areincluded within the income statement but also taken account of in determining the charge in the incomestatement for the transfer to the liability for unallocated surplus of with-profits funds.

(ii) Other pension plans

The Group operates various defined contribution pension schemes including schemes in Jackson andAsia. As noted earlier, the cost of the Group’s contributions for continuing operations to these schemesin 2007 was £28 million (2006: £22 million; 2005: £19 million).

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

I2: Share-based payments

(a) Relating to Prudential plc shares

The Group maintains 10 main share award and share option plans relating to Prudential plc shares,which are described below.

The GPSP is the incentive plan in which all executive directors and other senior executives withinthe Group can participate. This scheme was established as a replacement for the Restricted Share Plan(RSP) under which no further awards could be made after March 2006. Awards are granted either in theform of a nil cost option, conditional right over shares, or such other form that shall confer to theparticipant an equivalent economic benefit, with a vesting period of three years. The performancemeasure for the awards is that Prudential’s Total Shareholder Return (TSR) outperforms an indexcomprising of peer companies. Vesting of the awards between each performance point is on a straightline sliding scale basis. Participants are entitled to the value of reinvested dividends that would haveaccrued on the shares that vest. Shares are currently purchased in the open market by a trust for thebenefit of qualifying employees.

The RSP was, until March 2006, the Group’s long-term incentive plan for executive directors andother senior executives designed to provide rewards linked to shareholder return. Each year participantswere granted a conditional option to receive a number of shares. There was a deferment period of threeyears at the end of which the award vested to an extent that depended on the performance of theGroup’s shares including notional reinvested dividends and on the Group’s underlying financialperformance. After vesting, the option may be exercised at zero cost at any time, subject to closedperiod rules, in the balance of a 10-year period. Shares are purchased in the open market by a trust forthe benefit of qualifying employees. The RSP replaced the Executive Share Option Scheme in 1995 andall options under this plan had been exercised at December 31, 2005.

No rights were granted in the RSP if the Company’s TSR performance as ranked against thecomparator group is below 50th percentile. An option of 25 per cent of the maximum award is made.The maximum grant is made only if the TSR ranking of the Company is 20th percentile or above.Between these points, the size of the grant of option made is calculated on a straight line sliding scale

The BUPP is an incentive plan created to provide a common framework under which awards wouldbe made to senior employees and in the UK, Jackson and Asia include the Chief Executive Officers.Awards under this plan in 2006 and 2007 were based on growth in Shareholder Capital Value on theEuropean Embedded Value (EEV) basis with performance measured over three years. Upon vesting, halfof the vested award is released as shares and the other half released in cash. Participants are entitled toreceive the value of reinvested dividends over the performance period for those shares that vest. Thegrowth parameters for the awards are relevant to each region and vesting of the awards between eachperformance point is on a straight line sliding scale basis.

UK-based executive directors are eligible to participate in the Prudential HM Revenue & Customs(HMRC) approved UK Savings Related Share Option Scheme (SAYE scheme) and the Asia-basedexecutive director can participate in the equivalent International SAYE scheme. The schemes allowemployees to save towards the exercise of options over Prudential plc shares, at an option price set atthe beginning of the savings period at a discount of up to 20 per cent to the market price. Savings

F-208

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

contracts may be up to £250 per month for three or five years, or additionally in the UK scheme sevenyears. On maturity at the end of the set term, participants may exercise their options within six monthsof the end of the savings period and purchase Prudential plc shares. If an option is not exercised withinsix months, participants are entitled to a refund of their cash contributions plus interest if applicableunder the rules. Shares are issued to satisfy options that are exercised. No options may be grantedunder the schemes if the grant would cause the number of shares which have been issued, or whichremain issuable pursuant to options granted in the preceding 10 years under the scheme and othershare option schemes operated by the Company, or which have been issued under any other shareincentive scheme of the Company, to exceed 10 per cent of the Company’s ordinary share capital at theproposed date of grant.

UK-based executive directors are also eligible to participate in the Company’s HMRC approvedShare Incentive Plan which allows all UK-based employees to purchase shares of Prudential plc(partnership shares) on a monthly basis out of gross salary. For every four partnership shares bought, anadditional matching share is awarded, purchased on the open market. Dividend shares accumulate whilethe employee participates in the plan. Partnership shares may be withdrawn from the scheme at anytime. If the employee withdraws from the plan within five years, the matching shares are forfeit and ifwithin three years, dividend shares are forfeit.

Jackson operates a performance-related share award which, subject to the prior approval of theJackson Remuneration Committee, may grant share awards to eligible Jackson employees in the form ofa contingent right to receive shares or a conditional allocation of shares. These share awards havevesting periods of four years and are at nil cost to the employee. Award holders do not have any rightto dividends or voting rights attaching to the shares. The shares are held in the employee share trust inthe form of American Depository Receipts which are tradable on the New York Stock Exchange.

Certain senior executives have annual incentive plans with awards paid in cash up to the target levelof their plan. The portion of any award for above target performance is made in the form of awards ofshares deferred for three years, with the release of shares subject to close periods. The shares are heldin the employee share trust and shares equivalent to dividends otherwise payable will accumulate for thebenefit of award holders during the deferral period up to the release date.

In addition, there are other share awards which included the 1,000 Day Long Term Incentive Plan(LTIP) and other arrangements.

The 1,000 Day LTIP plan was a UK insurance operations performance-based plan in which the UKRemuneration Committee could, at any time up to October 5, 2005, select employees at its absolutediscretion, for participation in the plan. The performance period was 1,000 days and, based on the finalperformance level being at, or above, the threshold level, the committee shall grant participants 10 percent of the allocated award in 2005, 20 per cent in 2006 and the remaining 70 per cent in 2007. Thereare no beneficial interests, or any rights to dividends until such time as the awards are released, at nilcost, to participants.

The other arrangements relate to various awards that have been made without performanceconditions to individual employees, typically in order to secure their appointment or ensure retention.

F-209

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

Movements in share options outstanding under the Group’s share-based compensation plansrelating to Prudential plc shares during 2007, 2006 and 2005 were as follows:

2007 2006 2005

Weighted Weighted Weightedaverage average average

Options outstanding (including Number of exercise Number of exercise Number of exerciseconditional options) options price options price options price

(millions) £ (millions) £ (millions) £

Beginning of year . . . . . . . . . . . 16.5 2.47 17.2 2.23 18.4 2.21Granted . . . . . . . . . . . . . . . . 4.0 2.69 7.7 2.96 3.7 1.83Exercised . . . . . . . . . . . . . . . (1.9) 3.42 (5.1) 2.75 (1.1) 2.78Forfeited . . . . . . . . . . . . . . . . (1.4) 1.37 (1.2) 0.85 (1.9) 0.81Expired . . . . . . . . . . . . . . . . . (2.7) 2.13 (3.1) 4.09 (1.9) 2.21Adjustment in respect of Egg’s

employees . . . . . . . . . . . . . — — 1.0 3.64 — —

End of year . . . . . . . . . . . . . . . 14.5 2.57 16.5 2.47 17.2 2.23

Options immediately exercisable,end of year . . . . . . . . . . . . . . 0.2 3.35 0.2 3.56 0.4 3.30

The weighted average share price of Prudential plc for the year ended December 31, 2007 was£7.15 compared to £6.25 for the year ended December 31, 2006 and compared to £5.01 for the yearended December 31, 2005.

Movements in share awards outstanding under the Group’s share-based compensation plans relatingto Prudential plc shares at December 31, 2007, 2006 and 2005 were as follows:

2007 2006 2005Number of Number of Number of

Awards outstanding awards awards awards

(millions) (millions) (millions)

Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.6 4.9 2.4Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8 3.2 2.8Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.3) (1.0) (0.1)Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.1) (0.5) (0.1)Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (0.1)

End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 6.6 4.9

F-210

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

The following table provides a summary of the range of exercise prices for Prudential plc options(including conditional options) outstanding at December 31, 2007.

Outstanding Exercisable

Weightedaverage Weighted Weighted

remaining average averageNumber contractual exercise Number exercise

Range of exercise prices outstanding life prices exercisable prices

(millions) (years) £ (millions) £

Between £0 and £1 . . . . . . . . . . . . . . . 5.5 8.6 — — —Between £1 and £2 . . . . . . . . . . . . . . . — — — — —Between £2 and £3 . . . . . . . . . . . . . . . 2.7 1.3 2.66 — —Between £3 and £4 . . . . . . . . . . . . . . . 1.2 1.7 3.62 0.2 3.37Between £4 and £5 . . . . . . . . . . . . . . . 2.9 2.7 4.62 — —Between £5 and £6 . . . . . . . . . . . . . . . 2.2 3.5 5.62 — —Between £6 and £7 . . . . . . . . . . . . . . . — 0.9 6.55 — 6.95Between £7 and £8 . . . . . . . . . . . . . . . — — — — —

14.5 4.7 2.57 0.2 3.35

The following table provides a summary of the range of exercise prices for Prudential plc options(including conditional options) outstanding at December 31, 2006.

Outstanding Exercisable

Weightedaverage Weighted Weighted

remaining average averageNumber contractual exercise Number exercise

Range of exercise prices outstanding life prices exercisable prices

(millions) (years) £ (millions) £

Between £0 and £1 . . . . . . . . . . . . . . . . 5.7 8.6 — — —Between £1 and £2 . . . . . . . . . . . . . . . . — — — — —Between £2 and £3 . . . . . . . . . . . . . . . . 3.2 2.3 2.66 — 2.66Between £3 and £4 . . . . . . . . . . . . . . . . 3.1 2.0 3.52 0.2 3.62Between £4 and £5 . . . . . . . . . . . . . . . . 3.8 3.6 4.60 — —Between £5 and £6 . . . . . . . . . . . . . . . . 0.7 3.3 5.63 — 5.79Between £6 and £7 . . . . . . . . . . . . . . . . — 0.6 6.41 — 6.34Between £7 and £8 . . . . . . . . . . . . . . . . — 0.9 7.15 — —

16.5 4.8 2.47 0.2 3.56

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

The following table provides a summary of the range of exercise prices for Prudential plc options(including conditional options) outstanding at December 31, 2005.

Outstanding Exercisable

Weightedaverage Weighted Weighted

remaining average averageNumber contractual exercise Number exercise

Range of exercise prices outstanding life prices exercisable prices

(millions) (years) £ (millions) £

Between £0 and £1 . . . . . . . . . . . . . . . . 4.7 8.3 — — —Between £1 and £2 . . . . . . . . . . . . . . . . — — — — —Between £2 and £3 . . . . . . . . . . . . . . . . 8.0 1.9 2.66 — —Between £3 and £4 . . . . . . . . . . . . . . . . 3.5 2.7 3.53 0.4 3.29Between £4 and £5 . . . . . . . . . . . . . . . . 0.8 3.9 4.07 — —Between £5 and £6 . . . . . . . . . . . . . . . . 0.2 1.3 5.63 0.0 5.39Between £6 and £7 . . . . . . . . . . . . . . . . 0.0 1.1 6.56 0.0 6.66Between £7 and £8 . . . . . . . . . . . . . . . . 0.0 1.7 7.15 0.0 7.15

17.2 3.9 2.23 0.4 3.30

The years shown above for weighted average remaining contractual life include the time periodfrom end of vesting period to expiration of contract.

The weighted average fair values of Prudential plc options and awards granted during the period areas follows:

2007 2006 2005

Weighted average fair value Weighted average fair value Weighted average fair value

Other RSP Other OtherGPSP options Awards and GPSP options Awards RSP options Awards

£ £ £ £ £ £ £ £ £

4.78 2.55 7.33 4.30 2.05 6.46 2.96 1.82 4.59

The fair value amounts relating to all options including conditional nil cost options above weredetermined using the Black-Scholes and the Monte Carlo option-pricing models using the followingassumptions:

2007 2006 2005

Other RSP and Other OtherGPSP options GPSP options RSP options

Dividend yield (%) . . . . . . . . . . . . . . . . . . . . 2.32 2.32 2.64 2.64 3.19 3.19Expected volatility (%) . . . . . . . . . . . . . . . . . . 28.90 27.17 25.48 34.32 42.93 40.38Risk-free interest rate (%) . . . . . . . . . . . . . . . . 5.46 5.25 4.68 4.70 4.65 4.41Expected option life (years) . . . . . . . . . . . . . . 3.0 3.48 3.00 3.42 3.00 3.62Weighted average exercise price (£) . . . . . . . . . — 5.62 — 5.06 — 3.97

Weighted average share price (£) . . . . . . . . . . 7.52 7.47 6.80 6.51 5.01 5.12

F-212

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

Under IFRS, compensation costs for all share-based compensation plans are determined using theBlack-Scholes model and the Monte Carlo model. Share options and awards are valued using the shareprice at the date of grant. The compensation costs for all awards and options are recognized in netincome over the plans’ respective vesting periods. The Group uses the Black-Scholes model to value alloptions and awards other than the GPSP, for which the Group uses a Monte Carlo model in order toallow for the impact of the TSR performance conditions. These models are used to calculate fair valuesfor share options and awards at the grant date based on the quoted market price of the stock at themeasurement date, the amount, if any, that the employees are required to pay, the dividend yield,expected volatility, risk-free interest rates and exercise prices.

The expected volatility is measured as the standard deviation of expected share price returns basedon statistical analysis of daily share prices over a period up to the grant date equal to the expected lifeof options. Risk-free interest rates are UK gilt rates with projections for three, five and seven year termsto match corresponding vesting periods. Dividend yield is determined as the average yield over the yearof grant and expected dividends are not incorporated into the measurement of fair value. For the GPSP,volatility and correlation between Prudential and an index constructed from a simple average of the TSRgrowth of 11 companies is required. For grants in 2007, an average index volatility and correlation of18 per cent and 72 per cent respectively, were used.

When options are granted or awards made to employees, an estimate is made of what percentage ismore than likely to vest, be forfeited, lapse or cancelled based on historical information. Based on theseestimates, compensation expense to be accrued at that date is calculated and amortized over the vestingperiod. For early exercises of options or release of awards due to redundancy, death or resignation, thecompensation expense is immediately recognized and for forfeitures due to employees leaving theGroup, any previously recognized expense is reversed. However, if an employee loses their awardbecause of the Group’s failure to meet the performance criteria, previously recognized expense is notreversed.

During the year, the Group granted share options to certain non-employee independent financialadvisors. Those options were measured using the Black-Scholes option pricing model with assumptionsconsistent with those of other share options. These transactions were measured using an option modelbecause the Group does not receive a separate and measurable benefit from those non-employees inexchange for the options granted. As such, the fair value of the options themselves is more readilydeterminable than the services received in return.

(b) Relating to Egg plc shares

In April 2006, Prudential became bound or entitled to acquire shares in Egg following theannouncement of its intention in December 2005 to acquire the minority interests in Egg representingapproximately 21.7 per cent of the existing issued share capital of Egg. As a consequence of thisacquisition, employees of Egg that were participants of its SAYE schemes were requested to eitherrollover all or part of their options for equivalent options in Prudential shares or to take no action.Employees could adopt different courses of actions for options granted on different dates but may onlyadopt one course of action in respect of each grant of options. The rollover was based on employeesreceiving 0.2237 Prudential shares for each Egg share that was under option with total amount payablefor the new Prudential shares being exactly the same as the total amount payable for the Egg shares. As

F-213

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

a result, all outstanding executive share options became exercisable and awards under the RSP wereassessed against the performance conditions. None of the awards met the performance conditions andthey have therefore lapsed in February 2006 following consideration of the performance measurementresults by the Remuneration Committee.

On May 1, 2007, Egg Banking plc was sold to Citi and, at December 31, 2007, there were nooutstanding SAYE options to acquire Egg shares.

(c) Total share-based payment expense

Total expense recognized in the year in the consolidated financial statements related to share-basedcompensation is as follows:

2007 2006 2005

£ million £ million £ million

Share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . 28 22 19Amount accounted for as equity-settled . . . . . . . . . . . . . . . . . . . . . . 19 14 15Carrying value at December 31 of liabilities arising from share-based

payment transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 18 10Intrinsic value of above liabilities for which rights had vested at

December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 1

I3: Key management remuneration

Key management constitutes the directors of Prudential plc as they have authority and responsibilityfor planning, directing and controlling the activities of the Group.

Total key management remuneration amounts to £15,670,000 (2006: £13,524,000; 2005:£13,688,000). This comprises salaries and short-term benefits of £9,496,000 (2006: £8,927,000; 2005:£8,087,000), post-employment benefits of £967,000 (2006: £1,020,000; 2005: £1,020,000), terminationbenefits of £nil (2006: £291,000; 2005: £1,600,000) and share-based payments of £5,207,000 (2006:£3,286,000; 2005: £2,969,000).

Post-employment benefits comprise the change in the transfer value of the accrued benefit relatingto directors’ defined benefit pension schemes in the year and the total contributions made to directors’other pension arrangements.

The share-based payments charge is the sum of £3,456,000 (2006: £1,880,000; 2005: £1,842,000),which is determined in accordance with IFRS 2, ‘Share-Based Payments’ (see note I2) and £1,751,000(2006: £1,406,000; 2005: £1,127,000) of deferred share awards.

Total key management remuneration includes total directors’ emoluments of £11,959,000 (2006:£11,084,000; 2005: £9,214,000), and additional amounts in respect of pensions and share-basedpayments.

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

I4: Fees payable to auditor

2007 2006 2005

£ million £ million £ million

Fees payable to the Company’s auditor for the audit of the Company’sannual accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 2.3 2.2

Fees payable to the Company’s auditor and its associates for otherservices:Audit of subsidiaries and associates pursuant to legislation . . . . . . . . 4.4 3.8 3.6Other services supplied pursuant to legislation . . . . . . . . . . . . . . . . 2.9 4.0 1.4Other services relating to taxation . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 0.2 0.5Valuation and actuarial services . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 0.0 0.0Services relating to corporate finance transactions . . . . . . . . . . . . . . 0.2 0.7 0.9All other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.0 1.3 4.2

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 12.3 12.8

In addition, there were fees incurred of £0.2 million (2006: £0.2 million; 2005: £0.1 million) for theaudit of pension schemes.

The Audit Committee regularly monitors the non-audit services provided to the Group by its auditorand has developed a formal Auditor Independence Policy which sets out the types of services that theauditor may provide, consistent with the guidance in Sir Robert Smith’s report ‘Audit Committees—Combined Code Guidance’ and with the provisions of the US Sarbanes-Oxley Act.

The Audit Committee annually reviews the auditor’s objectivity and independence.

I5: Related party transactions

Transactions between the Company and its subsidiaries are eliminated on consolidation.

In addition, the Company has transactions and outstanding balances with certain unit trusts, OEICs,collateralized debt obligations and similar entities which are not consolidated and where a Groupcompany acts as manager. These entities are regarded as related parties for the purposes of IAS 24. Thebalances are included in the Group’s balance sheet at fair value or amortized cost in accordance withtheir IAS 39 classifications. The transactions are included in the income statement and include amountspaid on issue of shares or units, amounts received on cancellation of shares or units and paid in respectof the periodic charge and administration fee. Further details of the aggregate assets, liabilities,revenues, profits or losses and reporting dates of entities considered to be associates under IFRS aredisclosed in note H8.

Various executive officers and directors of Prudential may from time to time purchase insurance,asset management or annuity products, or be granted mortgages or credit card facilities marketed byPrudential Group companies in the ordinary course of business on substantially the same terms,including interest rates and security requirements, as those prevailing at the time for comparabletransactions with other persons.

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

Apart from the transactions with directors referred to below, no director had an interest in shares,transactions or arrangements that requires disclosure, other than those given in Item 6 ‘Directors, Seniormanagement and Employees’. Key management remuneration is disclosed in note I3.

In 2007, prior to disposal, three (2006: three; 2005: two) directors had credit cards with thediscontinued banking operations. In 2007, 2006 and 2005, other transactions with directors werede-minimis both by virtue of their size and in the context of the directors’ financial positions. Asindicated above, all of the above noted transactions are on terms equivalent to those that prevail inarm’s length transactions.

I6: Subsidiary undertakings

(i) Principal subsidiaries

The principal subsidiary undertakings of the Company at December 31, 2007, all wholly ownedexcept PCA Life Assurance Company Limited, were:

Main activity Country of incorporation

The Prudential Assurance Company Limited . . . . . . . . . . Insurance England and WalesPrudential Annuities Limited* . . . . . . . . . . . . . . . . . . . Insurance England and WalesPrudential Retirement Income Limited (PRIL)* . . . . . . . . . Insurance ScotlandM&G Investment Management Limited* . . . . . . . . . . . . Asset management England and WalesJackson National Life Insurance Company* . . . . . . . . . . . Insurance USPrudential Assurance Company Singapore (Pte) Limited* . . Insurance SingaporePCA Life Assurance Company Limited* (99% owned) . . . . Insurance Taiwan

* Owned by a subsidiary undertaking of the Company.

Each subsidiary has one class of ordinary shares and operates mainly in its country of incorporation,except for PRIL which operates mainly in England and Wales.

(ii) Dividend restrictions and minimum capital requirements

Certain Group subsidiaries are subject to restrictions on the amount of funds they may transfer inthe form of cash dividends or otherwise to the parent company. UK insurance companies are required tomaintain solvency margins which must be supported by capital reserves and other resources, includingunrealized gains on investments. Jackson can pay dividends on its capital stock only out of earnedsurplus unless prior regulatory approval is obtained. Furthermore, without the prior regulatory approval,dividends cannot be distributed if all dividends made within the preceding 12 months exceed thegreater of Jackson’s statutory net gain from operations or 10 per cent of Jackson’s statutory surplus forthe prior year. In 2008, the maximum amount of dividends that can be paid by Jackson without priorregulatory approval is US$490 million (£246 million) (in 2007: US$412 million (£211 million)). TheGroup’s Asian subsidiaries, mainly the Singapore and Malaysia businesses, may remit dividends to theGroup, in general, provided the statutory insurance fund meets the capital adequacy standard requiredunder local statutory regulations.

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

PAC and Jackson are the two principal insurance subsidiaries of the Group, which together compriseapproximately 78 per cent (2006: 76 per cent) of total Group assets. At December 31, 2007, the PAClong-term fund’s excess of available capital resources over its regulatory requirement (as per line 42 ofForm 2 of the PAC FSA regulatory returns) was estimated to be £10.5 billion (2006: £9.7 billion) andthe statutory capital and surplus of Jackson was US$4.0 billion (£2.0 billion) (2006: US$3.7 billion(£1.9 billion)). The Group capital position statement for life assurance businesses is set out in note D5.

(iii) Acquisition and disposal of subsidiaries

2006

In December 2005, the Company announced its intention to acquire the minority interests in Eggrepresenting approximately 21.7 per cent of the existing issued share capital of Egg. The whole of theminority interests were acquired in the first half of 2006. Under the terms of the offer, Egg shareholdersreceived 0.2237 new ordinary shares in the Company for each Egg share resulting in the issue of41.6 million new shares in the Company.

The Company accounted for the purchase of minority interests using the economic entity method.Accordingly, £167 million was charged to retained earnings representing the difference between theconsideration paid (including expenses) of £251 million and the share of net assets acquired of£84 million.

2007

On January 29, 2007, the Company announced that it had entered into a binding agreement to sellEgg Banking plc to Citi. On May 1, 2007, the Company completed the sale. Additional details regardingthe disposal are set out in note J.

On November 9, 2007, the Company announced that it had completed the sale of PPM Capital, itsdirect private equity business.

(iv) PAC with-profits fund acquisition

The PAC with-profits fund acquired a number of venture capital holdings through PPM Capital andM&G in which the Group was deemed to have a controlling interest, in aggregate with, if applicable,other holdings held by, for example, the PSPS. Following the disposal of PPM Capital by the Group inNovember 2007, the Group is no longer deemed to have a controlling interest in investments managedby PPM capital and consequently any subsequent investments have not been consolidated into theGroup and the investments previously consolidated ceased to be consolidated from the date of disposalof PPM Capital. There were two venture investment acquisitions in 2007 and three in 2006. These wereacquisitions for:

2007

• 71 per cent of the voting equity interest of Orizon AG, an employment hiring agency, in March2007; and

• 78 per cent of the voting equity interest of Red Funnel, a ferry company, in June 2007.

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Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

Orizon AG was managed by PPM Capital while Red Funnel is managed by M&G.

2006

• 53 per cent of the voting equity interests of Histoire D’or, a jewellery retail company, in April2006;

• 51 per cent of the voting equity interests of Azzuri Communications, a business IT servicecompany, in June 2006; and

• 60 per cent of the voting equity interests of Paramount plc, a restaurant company, in September2006.

All of these venture investments were managed by PPM Capital.

These acquisitions are considered individually immaterial and therefore all information relating toventures acquisitions has been presented in aggregate throughout this note. Due to the nature ofventure investments, it is not practicable to provide certain information for those acquisitions, includingthe pro forma Group revenue and consolidated net profit information as if the acquisitions had occurredat the beginning of the year, and the carrying amounts, in accordance with IFRS, of each class of theacquirees’ assets, liabilities, and contingent liabilities immediately before acquisition.

The results of the aggregated ventures acquisitions in 2007, 2006 and 2005 have been included inthe consolidated financial statements of the Group commencing on the respective dates of acquisitionand contributed a loss of £8.3 million (2006: loss of £7.7 million; 2005: loss of £0.1 million) to earningswithin the income statement, which is also reflected as part of the change in unallocated surplus of thewith-profits fund. The results of Orizon AG included in the loss of £8.3 million above was from the dateof its acquisition to November 2007 when it ceased to be consolidated.

The table below identifies the net assets of these acquisitions and minor business purchases byexisting venture holdings.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

This reconciles the net assets to the consideration paid in 2007 and 2006:

Fair value Fair valueon on

Acquisition Acquisition2007 2006

£ million £ million

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 18Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 31Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 45Intangible assets other than goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 139Other non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 100Less liabilities, including current liabilities and borrowings . . . . . . . . . . . . . . . (304) (581)

(216) (248)Less minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (216) (248)Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313 336

Cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 88

Aggregate goodwill of £313 million (2006: £336 million) has been recognized for the excess of thecost over the Group’s interest in the net fair value of the entities’ assets, liabilities, and contingentliabilities acquired in 2007.

(v) PAC with-profits fund disposals and deconsolidation of venture fund investments

2007

In November 2007, the Group disposed of PPM Capital, following which the Group no longer has acontrolling interest in venture fund investment subsidiaries managed by PPM Capital and consequentlyhas ceased to consolidate these investments. The cessation of control arises from the Group’s interest inventure fund investments being held either through partnership agreements, with the Group a limitedpartner, or, where there is a direct holding, an asset management agreement being in place, both ofwhich result in the Group only being able to exert control under exceptional circumstances.

As a result SUSPA, TJ Hughes, Sterigenics, Muller & Weygandt, TMF Group, JOST, Histoire D’or,Azzuri Communications, Paramount plc and Orizon AG ceased to be consolidated as subsidiaryundertakings from the date of disposal of PPM Capital.

Goodwill and other intangible assets, net of amortization, relating to these investments of£916 million at the date of disposal of PPM Capital, were derecognized accordingly.

2006

In 2006, Upperpoint Distribution Limited, Taverner Hotel Group Pty Ltd, Orefi, Aperio GroupPty Ltd and BST Safety Textiles Luxembourg S.a.r.l., all venture subsidiaries of the PAC with-profitsfund, were disposed of for cash consideration of £133 million. Goodwill of £46 million and cash and

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

cash equivalents of £19 million were disposed of. Note that, in addition, one venture subsidiary wasclassified as held for sale at December 31, 2006 (see note H9).

I7: Commitments

(i) Operating leases

The Group leases various offices to conduct its business. Leases in which a significant portion of therisks and rewards of ownership are retained by the lessor are classified as operating leases. Paymentsmade under operating leases (net of any incentives received from the lessor) are charged to the incomestatement on a straight-line basis over the period of the lease.

2007 2006

£ million £ million

Future minimum lease payments for non-cancellable operating leases fall due duringthe following periods:

Not later than 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 53Later than 1 year and not later than 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . 126 142Later than 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 160

The total minimum future sublease rentals to be received on non-cancellable operating leases forland and buildings for the year ended December 31, 2007 was £0.4 million (2006: £1 million).

Minimum lease rental payments for the year ended December 31, 2007 of £50 million (2006:£50 million; 2005: £55 million) are included in the consolidated income statement.

(ii) Capital commitments

The Group has provided, from time to time, certain guarantees and commitments to third partiesincluding funding the purchase or development of land and buildings and other related matters. AtDecember 31, 2007, the aggregate amount of contractual obligations to purchase and developinvestment properties amounted to £64 million (2006: £146 million). The vast majority of thesecommitments have been made by the PAC with-profits fund.

I8: Cash flows

Structural borrowings of shareholder-financed operations comprise core debt of the holdingcompany and central finance subsidiaries, Jackson surplus notes and, prior to disposal, Egg debentureloans. Core debt excludes borrowings to support short-term fixed income securities programmes andnon-recourse borrowings of investment subsidiaries and consolidated investment funds of shareholder-financed operations. Cash flows in respect of these borrowings are included within cash flows fromoperating activities.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

I: Other notes (Continued)

Structural borrowings of with-profits operations relate solely to the £100 million 8.5 per centundated subordinated guaranteed bonds which contribute to the solvency base of SAIF. Cash flows inrespect of other borrowings of with-profits funds, which principally relate to consolidated investmentfunds and, prior to deconsolidation, venture fund investment subsidiaries, are also included within cashflows from operating activities.

Cash flows relating to discontinued operations, as detailed in note J1, are inflows of £157 million,£184 million and £94 million for the period of ownership in 2007, 2006 and 2005 respectively. All ofthese relate to cash flows from operating activities except for an outflow of £33 million in 2006 and2005 which relates to financing activities.

J: Discontinued banking operations

Discontinued banking operations relate entirely to UK banking operations following the sale onMay 1, 2007 of Egg Banking plc to Citi. Consideration payable to the Company was, net of expenses,£527 million cash. The reduction from the £575 million consideration noted in the originalannouncement primarily reflected Egg’s post-tax loss of £49 million for the period from January 1, 2007to the date of sale. Cash and cash equivalents disposed of were £1,065 million. Accordingly, the cashoutflow for the Group arising from the disposal of Egg, as shown in the consolidated cash flowstatement, was £538 million. Prior to the disposal the Group undertook banking operations almostwholly through its subsidiary, Egg Banking plc. Financial information in respect of Egg Banking plc,together with amounts in respect of its former parent Egg plc and its associate IFonline, have beenincluded in this note. Note I6 shows details of the purchase of the minority interests in Egg plc in 2006.

The Group has presented the income statement and balance sheet for discontinued bankingoperations in a format that demonstrates the characteristics and principal operations specific to a bank.The format is different from that of the Group consolidated income statement and balance sheet;however, total profit (loss) for the year and net assets remain the same. To understand how the amountspresented from discontinued banking operations are consolidated in the Group financial statements,refer to the primary segmental information for the income statement in note F1 and the primarysegmental information for the balance sheet in note B4.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

J: Discontinued banking operations (Continued)

J1: Income statement for discontinued banking operations

The profit (loss) included in the income statement in respect of discontinued banking operations forthe period of ownership is as follows:

2007 2006 2005

£ million £ million £ million

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261 783 894Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (148) (453) (582)

Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 330 312

Fee and commission income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 153 223Fee and commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (23) (23)Other operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 15 16

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 475 528

General administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . (56) (192) (213)Impairment losses on loans and cash advances to customers . . . . . . . . . (149) (384) (241)Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (49) (27)Profit on sale of Egg Banking plc . . . . . . . . . . . . . . . . . . . . . . . . . . . 290 — —

Profit (loss) before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 (150) 47

Tax attributable to shareholders’ profits . . . . . . . . . . . . . . . . . . . . . . . 19 45 1

Profit (loss) for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241 (105) 48

The interest income on financial assets not at fair value through profit and loss for the period ofownership in 2007 was £241 million (2006: £769 million; 2005: £797 million).

The interest expense on financial liabilities not at fair value through profit and loss for the period ofownership in 2007 was £148 million (2006: £428 million; 2005: £474 million).

Fee and commission income includes £27 million (2006: £83 million; 2005: £76 million) relating tofinancial instruments held at amortized cost. These fees primarily related to balance transfer fees andlate payment fees.

Fee and commission expense includes fee expenses relating to financial liabilities held at amortizedcost of £4 million (2006: £13 million; 2005: £13 million) which related to treasury fees.

Of the profit (loss) for the period of ownership in 2007, 2006 and 2005, a loss of £nil million, aloss of £2 million and a profit of £9 million respectively, are attributable to minority interests in Egg.

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Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

J: Discontinued banking operations (Continued)

J2: Balance sheet for discontinued banking operations

Assets, liabilities and shareholders’ funds included in the Group consolidated balance sheet as atDecember 31, 2006 in respect of discontinued banking operations are as follows:

2006

£ million

AssetsCash and balances with central banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Loans and advances to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903Loans and advances to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,193Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,976Derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 342

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,498

LiabilitiesDeposits by banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,220Customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,554Debt securities issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599Derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 228Subordinated liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 451

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,206

EquityShareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 292

Total equity and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,498

J3: Risk management overview

Through Egg the Group offered banking and credit card products and intermediated services.Through its normal operations, Egg was exposed to a number of risks, the most significant of which wascredit, operational, liquidity, market and currency risk. The overall responsibility for risk managementand the risk appetite of Egg was set by the Egg Board and responsibility for managing these risksresided with the Egg executive committee. The exposure to specific risks was monitored by the Eggexecutive committee through separate committees: the retail credit committee was responsible for retailcredit risk, the wholesale credit committee was responsible for wholesale credit risk, the operational riskcommittee was responsible for operational risk and the asset and liability committee (ALCO) wasresponsible for liquidity, market and currency risk.

Egg used financial instruments including derivatives for the purpose of supporting the strategic andoperational business activities and to reduce and eliminate the risk of losses arising from changes ininterest rates and foreign exchange rates.

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Notes to the Consolidated Financial Statements

December 31, 2007

J: Discontinued banking operations (Continued)

Surplus retail and wholesale liabilities were invested in debt securities, including certificates ofdeposits, government gilts and other high investment grade assets.

J4: Maturities of assets and liabilities and liquidity risk

Liquidity risk was defined for Egg as not having sufficient financial resources available to meet itsobligations as they fell due or if such resources could only be secured at excessive cost. Egg usedvarious methods including predictions of daily cash positions to monitor and manage liquidity risk.Maturity mismatches between lending and funding were managed within internal risk policy limits. Itensured that it held sufficient assets, which were immediately realizable into cash without significantexposure to market risk or costs, to cover a realistic estimate of retail funds that could be withdrawn.While a significant proportion of retail savings balances were on instant access terms, in practice themajority of such funds represented a relatively stable and consistent funding base for Egg.

The matching and controlled mismatching of the maturities and interest rates of assets and liabilitiesis fundamental to the management of a bank. It is unusual for banks ever to be completely matchedsince business transacted is often of uncertain terms and of different types.

The following table analyses the assets and liabilities of Egg into relevant maturity groupings basedon the remaining period at December 31, 2006 to the contractual maturity date.

Up to From 1 month From 3 months From 1 year 5 yearsAt December 31, 2006 1 month to 3 months to 1 year to 5 years and over Total

£ million £ million £ million £ million £ million £ millionAssetsCash and balances with central banks . . . . . 6 — — — — 6Loans and advances to banks . . . . . . . . . . 876 — — 2 25 903Loans and advances to customers . . . . . . . 1 2,725 42 1,338 2,087 6,193Investment securities . . . . . . . . . . . . . . . 466 696 176 266 372 1,976Derivative financial instruments . . . . . . . . . 61 — 17 — — 78Other assets . . . . . . . . . . . . . . . . . . . 68 159 41 74 — 342

Total assets . . . . . . . . . . . . . . . . . . . 1,478 3,580 276 1,680 2,484 9,498

LiabilitiesDeposits by banks . . . . . . . . . . . . . . . . 18 — 516 1,686 — 2,220Customer accounts . . . . . . . . . . . . . . . . 5,427 3 68 56 — 5,554Debt securities issued . . . . . . . . . . . . . . — — 553 46 — 599Derivative financial instruments . . . . . . . . . 56 — — 98 — 154Other liabilities . . . . . . . . . . . . . . . . . . 117 68 43 — — 228Subordinated liabilities . . . . . . . . . . . . . . — — — — 451 451

Total liabilities . . . . . . . . . . . . . . . . . 5,618 71 1,180 1,886 451 9,206

Net liquidity gap . . . . . . . . . . . . . . . . (4,140) 3,509 (904) (206) 2,033 292

J5: Losses on loans and advances

The following table details the movements in the allowance for losses on loans and advances tocustomers held by Egg for the period of ownership in 2007 and 2006. The aggregate loss on loans at

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Notes to the Consolidated Financial Statements

December 31, 2007

J: Discontinued banking operations (Continued)

the end of the year and the charge during the period of ownership have been included in theconsolidated financial statements.

2007 2006

£ million £ million

Balance at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 335Amounts written off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141) (201)New and additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 384Balance at time of disposal of Egg Banking plc . . . . . . . . . . . . . . . . . . . . . . . . . (526) —

Balance at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 518

Impairment losses on loans and advances to customers

Where financial assets are carried at amortized cost, the Group measures the amount of theimpairment loss by comparing the carrying amount of the asset with the present value of its estimatedcash flows.

Impairment losses on loans and advances to customers of Egg were based on an actual loss modeland all impairments were only being held against debt that had objective evidence of either anindividual or a collective impairment. For individually assessed impaired assets this was established bythe delinquency state of debt based on the number of payments they are in arrears. For collectivelyassessed impaired assets this assessment was based on the level of accounts operating out of agreedterms showing other objective evidence of impairment from which behavior analysis impairment isprojected by using Markov probability matrices.

J6: Market risk

Interest rate risk

The primary market risk to which Egg was exposed was interest rate risk. Interest rate risk arose inEgg as a result of fixed rate, variable rate and non-interest bearing assets and liabilities. Exposure tointerest rate movements arose when there was a mismatch between interest rate sensitive assets andliabilities.

The composition of interest rate risk was closely monitored and managed on a day-to-day basis bythe treasury function where professional expertise and systems existed to control it. This was primarilydone via asset and liability models that looked at the sensitivity of earnings to movements in interestrates to measure overall exposure which could then be hedged in accordance with the policy limits setby the ALCO.

For the purpose of reducing interest rate risk, Egg used a number of derivative instruments such asinterest rate swaps and forward rate agreements (see note G3).

F-225

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

J: Discontinued banking operations (Continued)

Financial assets and liabilities not held at fair value through profit and loss and the weightedaverage effective interest rate for those balances at December 31, 2006 are provided below:

2006

£ million

AssetsDebt securities available-for-sale* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,935 5.3%Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,096 9.0%

9,031

LiabilitiesBanking customer accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,554 4.9%Core structural borrowings of shareholder-financed operations . . . . . . . . . . . . . . . . 451 6.2%Operational borrowings attributable to shareholder-financed operations . . . . . . . . . . 2,819 5.4%

8,824

* Egg also classified £41 million of debt securities as fair value through profit and loss.

See note G2 for further information on interest rate risk.

Currency risk

The risks arising from assets and liabilities denominated in foreign currencies were managed by aseparate treasury function within Egg and within agreed limits set by the ALCO. During the year, cashflows generated by the foreign currency assets and liabilities were hedged by using derivative contractsto manage exposure to exchange rate fluctuations.

At December 31, 2006, Egg held £357 million of assets and £1,751 million of liabilities with foreigncurrency exposure.

J7: Credit risk

Egg took on exposure to credit risk, which was the risk that a counterparty would be unable to payamounts in full when due. To limit this risk, Egg placed limits on the amount of risk accepted in relationto a particular borrower, groups of borrowers, and to particular geographical segments. The acceptablerisk levels were monitored regularly and reviewed where appropriate.

F-226

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

J: Discontinued banking operations (Continued)

The following table identifies the geographical concentrations of credit risk, stated in terms of totalassets and off-balance sheet items, held by Egg at December 31, 2006:

2006

£ million

UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,132Rest of Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Total* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,619

* This includes £9,475 million of off-balance sheet items, which mainly relate to unutilized credit limits on credit cards.

The following is a breakdown of the credit risk borne by Egg for financial assets and off-balancesheet items at December 31, 2006:

2006

£ million

Loans and advances to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 903Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,970Loans and advances to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,711Allowances for impairment losses on loans and advances to customers . . . . . . . . . . . . . . . . (518)Fair value of derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78Off-balance sheet items (including unutilized credit limits on credit cards) . . . . . . . . . . . . . . 9,475

Total credit risk net of allowances and provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,619

At December 31, 2006, Egg had certain credit-related commitments in the form of unused creditlimits on credit cards of £9,458 million and pre-approved but unused borrowing limits on mortgages andpersonal loans of £8 million and £9 million respectively which are included in off-balance sheet itemsabove. Egg was potentially exposed to a loss totalling these amounts, but it was unlikely that such a losswould arise as these credit facilities were granted only on the basis of the customers having achievedcertain credit standards. Additionally, it was unlikely, should all these customers have utilized their creditor borrowing limits, that all of them would default on their debt entirely.

Egg held significant concentrations of credit risk with other financial institutions. At December 31,2006, this was estimated at £8.7 billion of which £3.9 billion related to derivative financial instrumentsand £1.8 billion to credit default swaps. Egg also had significant credit exposure in asset-backed securityproducts which totaled approximately £403 million at December 31, 2006. With regard to loans andadvances to customers, Egg had significant concentrations of credit risk in respect of its unsecuredlending on credit cards, personal loans and mortgage lending secured on property in the UK.

Assets pledged as collateral and securitization

Egg entered into securities lending arrangements, including repurchase agreements andover-the-counter derivative transactions, as part of normal operating activities. Assets were pledged ascollateral to support these activities. Collateral in respect of repurchase agreements was £nil at

F-227

Prudential plc and Subsidiaries

Notes to the Consolidated Financial Statements

December 31, 2007

J: Discontinued banking operations (Continued)

December 31, 2006. Collateral in respect of over-the-counter derivative transactions was £29.3 million atDecember 31, 2006. See note G4 where amounts relating to Egg have been included in the disclosureof these transactions on a Group basis.

Egg issued debt securities in order to finance certain portfolios of loans and investment assets.These obligations were secured on Egg’s assets. The securitized assets and the related liabilities werepresented gross within the relevant headings in the balance sheet under the ‘gross presentation’method.

For further information on Egg’s securitization of credit card receivables, see note G4.

J8: Capital position

At December 31, 2006 Egg had a capital surplus of £210 million over required regulatory capitallevels.

F-228

INDEX TO THE CONDENSED FINANCIAL INFORMATION OF REGISTRANT

Page

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2

Profit and Loss Accounts for the years ended December 31, 2007, 2006 and 2005 . . . . . . . . . . S-3

Balance Sheets at December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-4

Statement of Total Recognized Gains and Losses for the years ended December 31, 2007, 2006and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5

Reconciliation of Movements in Shareholders’ Capital and Reserves for the years endedDecember 31, 2007, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-5

Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 . . . . . . . . . . S-6

Notes to the Condensed Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-7

S-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON THE CONDENSEDFINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Shareholders of Prudential plc

Under date of May 15, 2008, we reported on the consolidated balance sheet of Prudential plc (‘‘theCompany’’) and its subsidiaries (collectively, ‘‘the Group’’) as of December 31, 2007 and 2006, and therelated income statement, statement of changes in equity and cash flow statement for each of the yearsin the three-year period ended December 31, 2007, prepared in conformity with International FinancialReporting Standards (‘‘IFRS’’) as issued by the International Accounting Standards Board (‘‘IASB’’), whichare included herein. In connection with our audits of the aforementioned consolidated financialstatements, we also audited the related condensed financial statement schedule included herein andappearing on pages S-3 to S-10, which has been prepared in accordance with UK Generally AcceptedAccounting Practice (‘‘UK GAAP’’). This condensed financial statement schedule is the responsibility ofthe Group’s management. Our responsibility is to express an opinion on this schedule based on ouraudits.

In our opinion, such condensed financial statement schedule, when considered in relation to thebasic consolidated financial statements taken as a whole, presents fairly, in all material respects, theinformation set forth therein.

May 15, 2008 By: /s/ KPMG AUDIT PLC

KPMG Audit PlcLondon, England

S-2

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

PROFIT AND LOSS ACCOUNTS (UK GAAP BASIS)

Years ended December 31

2007 2006 2005

(In £ Millions)

Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638 1,499 654Investment expenses and charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (509) (771) (445)Other charges:

Corporate expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (81) (60) (30)Provision against loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30) (62) (41)Foreign currency exchange gains (losses) . . . . . . . . . . . . . . . . . . . . . . . . . 2 259 (113)

Profit on ordinary activities before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 865 25Tax (charge) credit on profit on ordinary activities . . . . . . . . . . . . . . . . . . . (37) (31) 93

(Loss) profit for the financial year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) 834 118

The accompanying notes are an integral part of this condensed financial information

S-3

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

BALANCE SHEETS (UK GAAP BASIS)

December 31

2007 2006

(In £ Millions)

Fixed assetsInvestments:

Shares in subsidiary undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,151 6,085Loans to subsidiary undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,809 2,841

9,960 8,926

Current assetsDebtors:

Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 17Amounts owed by subsidiary undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,291 2,057

Other debtors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 42Cash at bank and in hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 255

3,504 2,371

Less liabilities: amounts falling due within one yearCommercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,422) (2,017)Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48) (5)Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (144) (100)Amounts owed to subsidiary undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,455) (667)Tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (332) (290)Sundry creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (26)Accruals and deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44) (42)

(5,451) (3,147)

Net current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,947) (776)

Total assets less current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,013 8,150Less liabilities: amounts falling due after more than one yearSubordinated liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,566) (1,533)Debenture loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (797) (797)Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (10)Amounts owed to subsidiary undertakings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,643) (2,532)

(5,013) (4,872)

Total net assets (excluding pensions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 3,278Pension assets (liabilities) (net of related deferred tax) . . . . . . . . . . . . . . . . 117 34

Total net assets (including pensions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,117 3,312

Capital and reservesShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 122Share premium . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,828 1,822Profit and loss account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,166 1,368

Shareholders’ funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,117 3,312

The accompanying notes are an integral part of this condensed financial information

S-4

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

STATEMENT OF TOTAL RECOGNIZED GAINS AND LOSSES (UK GAAP BASIS)

Years ended December 31

2007 2006 2005

(In £ Millions)

(Loss) profit for the financial year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) 834 118Actuarial gains (losses) recognized in respect of the pension scheme (net of

related deferred tax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 83 (21)

Total recognized gains relating to the financial year . . . . . . . . . . . . . . . . . 49 917 97

RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS’ CAPITALAND RESERVES (UK GAAP BASIS)

RetainedNumber of Ordinary Share Profit and

Ordinary Shares Share Capital Premium Loss Reserve Total

(In Millions) (In £ Millions)

January 1, 2005 . . . . . . . . . . . . . . . . . 2,375 119 1,560 1,004 2,683Total recognized gains relating to 2005 . . . — — — 97 97Dividends . . . . . . . . . . . . . . . . . . . . . . . — — — (378) (378)New share capital subscribed . . . . . . . . . . 12 — 55 — 55Transfer for shares issued in lieu of cash

dividends . . . . . . . . . . . . . . . . . . . . . — — (51) 51 —

January 1, 2006 . . . . . . . . . . . . . . . . . 2,387 119 1,564 774 2,457Total recognized gains relating to 2006 . . . — — — 917 917Dividends . . . . . . . . . . . . . . . . . . . . . . . — — — (398) (398)New share capital subscribed . . . . . . . . . . 57 3 333 — 336Transfer for shares issued in lieu of cash

dividends . . . . . . . . . . . . . . . . . . . . . — — (75) 75 —

January 1, 2007 . . . . . . . . . . . . . . . . . 2,444 122 1,822 1,368 3,312Total recognized gains relating to 2007 . . . — — — 49 49Dividends . . . . . . . . . . . . . . . . . . . . . . . — — — (426) (426)New share capital subscribed . . . . . . . . . . 26 1 181 — 182Transfer for shares issued in lieu of cash

dividends . . . . . . . . . . . . . . . . . . . . . — — (175) 175 —

December 31, 2007 . . . . . . . . . . . . . . 2,470 123 1,828 1,166 3,117

The accompanying notes are an integral part of this condensed financial information

S-5

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

STATEMENTS OF CASH FLOWS (UK GAAP BASIS)

Years ended December 31

2007 2006 2005

(In £ Millions)

OperationsNet cash inflow from operating activities before interest and tax . . . . . . . . . 591 1,509 567Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (380) (344) (390)Taxes recovered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 122 95Acquisitions and disposalsInvestment in shares in subsidiary undertakings . . . . . . . . . . . . . . . . . . . . (1,792) (35) (153)Disposal of Egg Banking plc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527 — —

Net cash outflow from acquisitions and disposals . . . . . . . . . . . . . . . . . . . (1,265) (35) (153)

Equity dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250) (323) (378)

Net cash (outflow) inflow before financing . . . . . . . . . . . . . . . . . . . . (1,289) 929 (259)

FinancingIssue of ordinary share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 15 55Issue of borrowings, net of repayment . . . . . . . . . . . . . . . . . . . . . . . . . . 0 (1) 24Issue of commercial paper and other borrowings to support a short-term fixed

income securities reinvestment program . . . . . . . . . . . . . . . . . . . . . . . . 446 560 404Movement in net amount owed by subsidiary undertakings . . . . . . . . . . . . . 760 (1,369) (257)

Net cash inflow (outflow) from financing . . . . . . . . . . . . . . . . . . . . . . . . . 1,212 (795) 226

Net cash (outflow) inflow for the year . . . . . . . . . . . . . . . . . . . . . . . . (77) 134 (33)

Reconciliation of profit on ordinary activities before tax to net cashinflow from operating activities

Profit on ordinary activities before tax . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 865 25Add back: interest charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440 463 411Adjustments for non-cash items:Fair value adjustments on derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 7 34Pension scheme credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24) (41) (35)Foreign currency exchange movements . . . . . . . . . . . . . . . . . . . . . . . . . . 59 (152) 112Provisions against investments and loans . . . . . . . . . . . . . . . . . . . . . . . . . 30 363 41Loss on sale of Egg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 — —Decrease (increase) in debtors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 14 (23)(Decrease) increase in creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) (10) 2

Net cash inflow from operating activities . . . . . . . . . . . . . . . . . . . . . . 591 1,509 567

The accompanying notes are an integral part of this condensed financial information

S-6

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

NOTES TO THE CONDENSED FINANCIAL STATEMENT SCHEDULE

December 31, 2007

1 Accounting policies

The financial statements of the parent company are prepared in accordance with applicableaccounting standards under UK Generally Accepted Accounting Practice (UK GAAP), including FinancialReporting Standards (FRS) and Statements of Standard Accounting Practice (SSAP). This is in line withthe parent company’s UK statutory basis of reporting.

Changes in accounting policies

FRS 29, ‘Financial Instruments: Disclosures’ which replaces the disclosure requirements of FRS 25,‘Financial Instruments: Disclosure and Presentation’ became effective in 2007. Similar to the treatmentadopted for FRS 25, the parent company has taken advantage of the exemption within FRS 29, from therequirements of this standard on the basis that the parent company is included in the publicly availableconsolidated financial statements of the Group that include disclosures that comply with IFRS 7,‘Financial Instruments: Disclosures’, which is equivalent to FRS 29.

An amendment to FRS 26, ‘Financial Instruments: Recognition and Measurement’ which bringsrecognition and derecognition requirements of IAS 39, ‘Financial Instruments: Recognition andMeasurement’ into FRS 26 became effective in 2007. The amendment applies only to financial assetsand liabilities. The relevant requirements of FRS 5, ‘Reporting the Substance of Transactions’ continue toapply to the recognition and derecognition of non-financial assets. The adoption of this amendment toFRS 26 did not have an impact on the balance sheet or profit and loss account of the parent company.

Significant accounting policies

Shares in subsidiary undertakings

Shares in subsidiary undertakings in the balance sheet of the parent company are shown at thelower of cost and estimated realizable value.

Loans to subsidiary undertakings

Loans to subsidiary undertakings in the balance sheet of the parent company are shown at cost,less provisions.

Derivatives

Derivative financial instruments are used to reduce or manage interest rate and currency exposures.The parent company’s policy is that amounts at risk through derivative transactions are covered by cashor by corresponding assets. Derivative financial instruments are carried at fair value with changes in fairvalue included in the profit and loss account.

Under FRS 26, hedge accounting is permissible only if certain criteria are met regarding theestablishment of documentation and continued measurement of hedge effectiveness. For derivativefinancial instruments designated as fair value hedges, the movements in the fair value are recorded inthe profit and loss account with the accompanying change in fair value of the hedged item attributableto the hedged risk.

S-7

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

NOTES TO THE CONDENSED FINANCIAL STATEMENT SCHEDULE

December 31, 2007

1 Accounting policies (Continued)

Borrowings

Borrowings are initially recognized at fair value, net of transaction costs, and subsequentlyaccounted for on an amortized cost basis using the effective interest method. Under the effectiveinterest method, the difference between the redemption value of the borrowing and the initial proceeds(net of transaction costs) is amortized through the profit and loss account to the date of maturity.

Dividends

Dividends are recognized in the period in which they are declared. Dividends declared after thebalance sheet date in respect of the prior reporting period are treated as a non-adjusting event.

Where scrip dividends are issued, the value of such shares, measured as the amount of the cashdividend alternative, is credited to reserves and the amount in excess of the nominal value of the sharesissued is transferred from the share premium account to retained profit.

Share premium

The difference between the proceeds received on issue of shares, net of issue costs, and thenominal value of the shares issued is credited to the share premium account.

Foreign currency translation

Foreign currency borrowings that have been used to finance or provide a hedge against Groupequity investments in overseas subsidiaries, are translated at year end exchange rates. The impact ofthese currency translations is recorded within the profit and loss account for the year.

Other assets and liabilities denominated in foreign currencies are also converted at year endexchange rates with the related foreign currency exchange gains or losses reflected in the profit and lossaccount for the year.

Tax

Current tax expense is charged or credited to operations based upon amounts estimated to bepayable or recoverable as a result of taxable operations for the current year. To the extent that losses ofan individual UK company are not offset in any one year, they can be carried back for one year orcarried forward indefinitely to be offset against profits arising from the same company.

Deferred tax assets and liabilities are recognized in accordance with the provisions of FRS 19‘‘Employee Benefits’’. The parent company has chosen not to apply the option available of recognizingsuch assets and liabilities on a discounted basis to reflect the time value of money. Except as set out inFRS 19, deferred tax is recognized in respect of all timing differences that have originated but notreversed by the balance sheet date. Deferred tax assets are recognized to the extent that it is regardedas more likely than not that they will be recovered.

The Group’s UK subsidiaries each file separate tax returns. In accordance with UK tax legislation,where one domestic UK company is a 75 per cent owned subsidiary of another UK company or both are

S-8

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

NOTES TO THE CONDENSED FINANCIAL STATEMENT SCHEDULE

December 31, 2007

1 Accounting policies (Continued)

75 per cent owned subsidiaries of a common parent, the companies are considered to be within thesame UK tax group. For companies within the same tax group, trading profits and losses arising in thesame accounting period may be offset for the purposes of determining current and deferred taxes.

Pensions

The parent company assumes a portion of the pension surplus or deficit of the Group’s largestpension scheme, the Prudential Staff Pension Scheme (PSPS). The parent company applies therequirements of FRS 17 ‘‘Retirement Benefits’’ (as amended in December 2006) to its portion of thePSPS surplus or deficit.

A pension surplus or deficit is recorded as the difference between the present value of the schemeliabilities and the fair value of the scheme assets.

The assets and liabilities of the defined benefit pension schemes of the Group are subject to a fulltriennial actuarial valuation using the projected unit method. Estimated future cashflows are thendiscounted at a high quality corporate bond rate to determine its present value. These calculations areperformed by independent actuaries.

The aggregate of the actuarially determined service costs of the currently employed personnel andthe unwind of the discount on liabilities at the start of the period, less the expected investment returnon the scheme assets at the start of the period, is recognized in the profit and loss account.

Actuarial gains and losses as a result of the changes in assumptions, the difference between actualand expected investment return on scheme assets or experience variances are recorded in the statementof total recognized gains and losses.

2 Dividends declared in the reporting period from subsidiary undertakings

2007 2006 2005

(In £ Millions)

The Prudential Assurance Company Limited . . . . . . . . . . . . . . . . . . . . . . . . . 288 248 383Prudential Holdings Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 862 —M&G Group Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 165 137Other subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 28 —

Total dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 1,303 520

S-9

SCHEDULE II

CONDENSED FINANCIAL INFORMATION OF REGISTRANT PRUDENTIAL plc

NOTES TO THE CONDENSED FINANCIAL STATEMENT SCHEDULE

December 31, 2007

3 Reconciliation from UK GAAP to IFRS

2007 2006 2005

(In £ Millions)

Net Income(Loss) profit for the financial year of the parent company in accordance with

UK GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) 834 118IFRS adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 92 (25)

Profit for the financial year of the parent company (including dividends from thesubsidiaries) in accordance with IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 926 93

Share in the IFRS profit of the Group net of distribution to the parent company . 973 (52) 655

Net income of the Group attributable to shareholders in accordance withIFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,022 874 748

2007 2006

(In £ Millions)

Net EquityShareholders’ equity of the parent company in accordance with UK GAAP and IFRS . . 3,117 3,312Share in the IFRS net equity of the Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,084 2,176

Shareholders’ equity of the Group in accordance with IFRS . . . . . . . . . . . . . . . 6,201 5,488

The parent company financial statements are prepared in accordance with UK GAAP and theconsolidated financial statements are prepared in accordance with IFRS as issued by the IASB. Theabove table provides a reconciliation between UK GAAP and IFRS.

The ‘‘IFRS adjustment’’ in the above net income table in respect of the parent company representsthe difference in the accounting treatment for pension liabilities between UK GAAP and IFRS. Theshares in the IFRS profit and net equity of the Group represent the parent company’s equity in theearnings and net assets of its subsidiaries and associates. The profit for the financial year of the parentcompany in accordance with UK GAAP and IFRS includes dividends declared in the year from subsidiaryundertakings of £387 million, £1,303 million and £520 million for the years ended December 31, 2007,2006, and 2005, respectively (see Note 2).

As stated in Note 1 to the condensed financial statement schedule, under UK GAAP, the parentcompany accounts for its investments in subsidiary undertakings at the lower of cost and estimatedrealizable value. For the purpose of this reconciliation, no adjustment is made to the parent company inrespect of any valuation adjustments to shares in subsidiary undertakings which would be eliminated onconsolidation

4 Guarantees provided by the parent company

In certain instances the parent company has guaranteed that its subsidiaries will meet theirobligations when they fall due for payment.

S-10

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and thatit has duly caused and authorized the undersigned to sign this annual report on its behalf.

PRUDENTIAL PLC

By: /s/ MARK TUCKERMay 15, 2008Name: Mark TuckerTitle: Group Chief Executive

Item 19. Exhibits

Documents filed as exhibits to this Form 20-F:

ExhibitNumber Description

1. Memorandum and Articles of Association of Prudential.

2.1 Form of Deposit Agreement among Prudential, Morgan Guaranty Trust Company of NewYork, as depositary, and holders and beneficial owners from time to time of ADRsissued thereunder, including the form of ADR.(1)

2.2 The total amount of long-term debt securities of Prudential plc authorized under anyinstrument does not exceed 10 per cent of the total assets of the Company on aconsolidated basis. Prudential plc hereby agrees to furnish to the Securities andExchange Commission, upon its request, a copy of any instrument defining the rights ofholders of long-term debt of Prudential plc or of its subsidiaries for which consolidatedor unconsolidated financial statements are required to be filed.

4.1 Restricted Share Plan, Group Performance Share Plan(5), Business Unit PerformancePlan(5) and M&G Executive Long-Term Incentive Plan

4.2 Executive Directors’ Service Contracts:Mark Tucker(3)

Clark Manning(2)

Michael McLintock(2)

Nick Prettejohn(4)

Barry Stowe(5)

Tidjane Thiam

4.3 Other benefits between the Prudential Group and Executive Directors:Mark TuckerClark ManningMichael McLintockNick PrettejohnBarry StoweTidjane Thiam

4.4 Chairman’s Letter of Appointment(3)

4.5 Other benefits between Prudential and the Chairman

4.6 Non-executive Directors’ Letters of AppointmentSir Winfried BischoffKeki Dadiseth(3)

Michael Garrett(3)

Ann GodbehereBridget Macaskill(3)

Kathleen O’Donovan(3)

James Ross(3)

Lord Turnbull(4)

ExhibitNumber Description

4.7 Other benefits between Prudential and the non-executive DirectorsSir Winfried BischoffKeki DadisethMichael GarrettAnn GodbehereBridget MacaskillKathleen O’DonovanJames RossLord Turnbull

6. Statement re computation of per share earnings (set forth in Note B1 to theconsolidated financial statements included in this Form 20-F).

8. Subsidiaries of Prudential (set forth in Note I6 to the consolidated financial statementsincluded in this Form 20-F).

12.1 Certification of Prudential plc’s Group Chief Executive pursuant to Section 302 of theSarbanes Oxley Act of 2002.

12.2 Certification of Prudential plc’s Chief Financial Officer pursuant to Section 302 of theSarbanes Oxley Act of 2002.

13.1 Annual certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

14.1 Consent of KPMG Audit Plc.

15.1 Prudential’s Code of Business Conduct.(5)

(1) As previously filed with the Securities and Exchange Commission on June 22, 2000 as an exhibit to Prudential’s Form F-6.

(2) As previously filed with the Securities and Exchange Commission on June 24, 2003 as an exhibit to Prudential’s Form 20-F.

(3) As previously filed with the Securities and Exchange Commission on June 24, 2005 as an exhibit to Prudential’s Form 20-F.

(4) As previously filed with the Securities and Exchange Commission on June 28, 2006 as an exhibit to Prudential’s Form 20-F.

(5) As previously filed with the Securities and Exchange Commission on June 28, 2007 as an exhibit to Prudential’s Form 20-F.

Merrill Corporation Ltd, London08ZBN72401